Seadrill Management Services Ltd & Anor v OAO Gazprom

The Claimants are both companies in the Seadrill group of companies, of which the ultimate beneficial owners are Norwegian shipping interests, including Mr John Fredriksen. The Second Claimant is the owner of the jack-up drilling rig EKHA (sometimes known as SEADRILL 5) and the First Claimant (known at the relevant time as Guildford Management Limited) was the manager of the various rigs and drilling units in the Seadrill fleet, including the EKHA. Save where it is necessary to distinguish between them, I will refer to the Claimants compendiously as “Seadrill” and I will refer to the EKHA as “the Rig”.

The Defendant (to which I will refer as “Gazprom”) is a Russian registered company specialising in the exploration for and exploitation of gas deposits. Gazprom was party to a Production Sharing Contract (“the PSC”) dated 3rd October 2000 concluded between it, the Gas Authority of India Limited (“GAIL”) and the Indian Government, under which Gazprom was licensed with GAIL for a period of seven years to carry out exploration for gas deposits as joint contractor with GAIL in Block NEC-OSN-97/1 (“the Block”) in the Bay of Bengal. In addition to the PSC, Gazprom entered an operating agreement with GAIL.

By a contract between the First Claimant and Gazprom on the International Daywork Drilling Contract-Offshore (“IDDCO”) form as developed by the International Association of Drilling Contractors (“IADC”) dated 10 September 2005, the First Claimant (referred to in the contract as “the Contractor”) agreed to furnish the Rig for the purpose of drilling one well in the Bay of Bengal. Under paragraph 910 (b) of the contract, the obligation to indemnify extended not just to the indemnified party but to any of its Affiliated Companies as defined. The Second Claimant fell within that definition and it is on that basis that the Second Claimant claims under the contract in these proceedings. The contract was to be in direct continuation of Seadrill’s existing contractual commitment drilling for Oriental Oil. The contract was silent as to its duration, although it seems to have been contemplated by both parties at the time that the drilling would take about 45 days.

The Rig was loaded on the carrying vessel ASIAN ATLAS at Dubai on 9 December 2005 and carried to the drilling location in the Bay of Bengal. Before drilling could begin, the Rig had to be preloaded, a process by which, in order to provide a firm support foundation, the three legs of the Rig are driven into the sub-sea soil under the weight of first the Rig itself and then, as necessary, seawater ballast which is used to provide additional weight, then dumped, a process which is repeated in four stages, with increasing amounts of ballast. The process simulates the maximum vertical loads which the Rig may later impose on the seabed. The final objective is to have applied a vertical load to the foundation for the Rig that will exceed the load which may be imposed by the Rig upon the foundation in operation, and also in foreseeable storm or other environmental condition when the Rig is elevated. The practical result of preloading is that the Rig, after it is completed, is at its maximum level of penetration evenly on all three legs and will not sink further during operation.

Preloading was on this occasion a protracted process because of the depth to which the legs were to penetrate the sub-sea soil, in excess of 40 metres. The process began on 2 January 2006 and was still continuing on the morning of 9 January 2006. In the period between 0200 hours and 0600 hours on that day during the stage 4 preloading, the stern legs (port and starboard) penetrated the sub-sea soil significantly, with uneven and excessive trim to the stern. As a consequence, the legs “bound” i.e. they could not be moved up or down. A number of recovery operations by the crew took place between then and 11 January 2006, which resulted in damage to the Rig, her legs and jacking systems.

The Rig was subsequently towed to the Keppel Fels shipyard in Singapore for repairs where she arrived on 17 February 2006. Whilst at the yard carrying out repairs to the damage sustained, she also undertook upgrade works both for reclassification with DNV and as required for service off Indonesia under Seadrill’s next contractual commitment with Premier Oil. On 16 May 2006 Gazprom wrote to Seadrill terminating the contract for alleged repudiatory breach by Seadrill, inter alia, in the negligent operation of the Rig in preloading and in undertaking the additional works at the yard.

Seadrill refuted the suggestion that it had repudiated the contract, claiming that Gazprom’s purported termination was itself repudiatory. On 10 July 2006, Seadrill wrote terminating the contract for repudiation of the contract by Gazprom and/or pursuant to paragraph 802 of the contract which provided for termination for non-payment of hire. Gazprom had never paid any hire under the contract, which remains the case.

Gazprom in fact eventually drilled the well and a second well in the Block using a semi-submersible unit called GALAXY DRILLER. After completion of repairs at the yard the Rig went into service with Premier Oil.

In these proceedings, Seadrill claims hire under the contract at various applicable rates from November 2005 to July 2006. It also claims for various uninsured losses in relation to the repairs, which it says it is entitled to recover by virtue of paragraph 606 of the contract. Gazprom accepts that, subject to set off of its counterclaims for damages, hire was payable from 9 December 2005 until the time of the incident, but disputes, for a number of reasons, that any hire was payable before 9 December 2005, when the Rig was loaded on the carrying vessel or after the incident occurred.

Gazprom’s case is that the incident was caused by mis-operation of the Rig during preloading, said to go beyond negligence and to amount to incompetence on the part of Seadrill and its personnel, in breach of an obligation to operate the Rig with reasonable skill and care, which Gazprom contends is the correct construction of paragraph 502 of the contract. Gazprom contends that that breach was sufficiently serious to be repudiatory and to entitle it to terminate the contract, which it did by its letter of 16 May 2006. Gazprom claims damages for that breach of contract, whether it was repudiatory or not.

Gazprom also contends that even if it was not entitled to terminate the contract for that breach, there was in fact another repudiatory breach in existence at the time, albeit unknown to Gazprom, namely that Seadrill’s commitment of the Rig to Premier Oil on the basis that it would be delivered into service with Premier Oil after completion of the works in the yard amounted to renunciation or repudiation through impossibility of performance.

Gazprom puts forward substantial counterclaims for the losses it contends it has suffered as a consequence of Seadrill’s breach of contract, repudiatory or otherwise. As a consequence of the Order which I made at the pre-trial review on 31 March 2009, the present trial has only been concerned with the issues of principle concerning quantum and any detailed dispute has been left for another day.

Before setting out in more detail the issues in the case and the facts, I should mention how the trial progressed and the extent to which certain areas of dispute narrowed during the course of the trial.

Seadrill’s pleaded case was that there was sudden and rapid penetration of the soil by the Rig on the morning of 9 January 2006, caused by what was in effect a hidden defect in the soil at the drilling location, namely that, although the strength of the soil generally increased with depth of penetration, the strength reduced between 33 and 36 metres before increasing again and the rate of increase in strength reduced after about 40 metres.

Quite apart from the fact that the factual evidence of those on board the Rig did not support a case of a sudden and rapid penetration (the sort of “punch through” which can happen during preloading where soft soil is encountered beneath heavy soil) the case that there was a defect in the soil was not supported by the expert evidence. Reports from geotechnical and PCPT data experts were exchanged and, after experts’ meetings took place and joint memoranda were produced, it became clear that it was essentially common ground between the various soil experts that the seabed features alleged by Seadrill were not present and that there was no increased risk of rapid and sudden penetration of the Rig’s legs due to the nature of the sub-sea soil conditions.

Notwithstanding this, at the outset of the trial Seadrill still maintained a case that there had been some reduction in strength of the soil based upon so-called “back calculations” carried out by its rig expert, Mr Hoyle. There were all sorts of problems with these calculations, but it is not necessary to go into those, since any case based on those calculations was abandoned by Seadrill at the conclusion of the factual evidence. It follows that there is no longer any case that there was any defect in the soil conditions.

Seadrill’s pleaded case also denied any negligence on the part of the Master of the Rig, Captain Yankovskiy. A witness statement had been obtained from him at an early stage, in November 2006, and Seadrill intended to call him to give evidence at the trial. In the event however, he could not obtain a visa from the British Embassy in Moscow to travel to London. I was informed of this on the second day of the trial, at which point Mr Richard Jacobs QC for Seadrill also said that his clients would admit that the conduct of the Master between 0200 hours and 0600 hours on 9 January 2006 in continuing to ballast, instead of dumping the pre-load and levelling the Rig, was negligent and that that negligence was a cause of the incident and of the damage to the Rig.

As explained in a subsequent letter from Seadrill’s solicitors, Holman Fenwick Willan of 18 May 2009, it was not being admitted that the Master’s negligence was the sole cause of the incident, since it was still Seadrill’s case that the seabed conditions were a concurrent cause. What was being said was that, although it was no longer being alleged that the bottom conditions were faulty (i.e. that there was a defect in the soil) it was still alleged that the seabed conditions had proved unsatisfactory to support the Rig within the meaning of paragraph 606 of the contract. I return to the significance of this in more detail below, in considering the correct construction of that paragraph.

At the outset of the trial, Gazprom was alleging that not only the negligent operation of the Rig and the commitment to Premier Oil amounted to repudiatory breach by Seadrill, but also that the carrying out of additional works at the Keppel Fels yard to upgrade the Rig for DNV classification and for the purposes of the Premier Oil contract was a repudiatory breach. This allegation necessitated not only the exchange of expert evidence on both sides about the repairs and the extent to which the additional works prolonged the Rig’s time in the yard, but factual evidence for Seadrill from Mr Dave Burgess (the Rig Manager who was on board during the works at the Keppel Fels yard in Singapore) and Mr Woo Boon Hwee, Keppel Fels’ senior project manager in charge of the works.

They both gave evidence at the trial, the latter by video link. I found them both straightforward and honest witnesses. They both confirmed the evidence of Mr Hans Van Royen (managing director of the First Claimant) in his witness statement (in fact unchallenged in cross-examination) that throughout the time the Rig was at the yard, priority was given to the repairs. They also refuted the suggestion, emanating principally from Gazprom’s repair expert, Mr McKenzie that, had it not been for the additional works, the repairs could have been completed in time for the Rig to return to the Bay of Bengal and finish drilling before the onset of the south west monsoon in May 2006 and that the additional works prolonged the Rig’s stay in the yard to a significant extent.

At the conclusion of the factual evidence, Gazprom abandoned its case that the carrying out of the additional works had been a breach of contract by Seadrill. That abandonment came as little surprise to me, since, with all respect to Gazprom’s expert, Mr McKenzie, the case in this regard had always seemed to me somewhat ambitious. The abandonment of this issue meant that it was not necessary for either repair expert to give evidence.

Having considered its position after the factual evidence had concluded in the light of the narrowing of the issues, Seadrill decided that it did not wish to cross-examine either Mr Hogg (Gazprom’s naval architecture/engineering expert) or Captain Mallett (Gazprom’s rig expert) and that it did not propose to call its own expert, Mr Hoyle (who covered both disciplines). This meant that, in the event, no oral expert evidence was called. In view of the admission of negligence and the extent to which there was agreement between the various experts in the joint memoranda, this was obviously a sensible course.

At the conclusion of the trial, the issues which remained for determination can be summarised as follows:

Whether, during the pre-contractual negotiations, Gazprom made clear to Seadrill that there were strict time constraints under the PSC with the Indian government which required drilling to be completed by the end of May 2006 and that any failure by Seadrill to complete in that timescale could lead to Gazprom being under a liability to the Indian government and/or GAIL?

Issues as to the correct construction of the contract, in particular:

Whether as Gazprom contends, paragraph 502 of the contract imposes an obligation on Seadrill to operate the Rig with reasonable skill and care so that the admitted negligence on the morning of 9 January 2006 was a breach of that obligation, sounding in damages or whether, as Seadrill contends, the effect of paragraphs 606, 910 and 911 was that there was an exclusive contractual code of risk allocation precluding any liability on the part of Seadrill for negligent operation of the Rig?

Whether as Seadrill contends, paragraph 606 has the effect of imposing on Gazprom both the risk and liability for what occurred on 9 January 2006?

Whether as Seadrill contends, paragraph 701 entitles it to be paid hire throughout the contract after 9 January 2006 notwithstanding its negligence or breach of contract and precludes Gazprom from recovering back any such hire as damages?

When the payment of the standby rate of hire commenced under the contract and when the operating rate of hire became payable?

Whether the conduct of the preloading operation prior to the incident was not only negligent but in breach of good industry practice so that it amounted to incompetence on the part of Seadrill?

Whether hire was payable for the period after the incident on 9 January 2006 and, if so, at what rate or rates?

Whether, if Seadrill was in breach of paragraph 502 as a consequence of the negligent operation of the Rig, that breach was repudiatory and entitled Gazprom to terminate the contract by its letter of 16 May 2006?

If that breach was not repudiatory, whether there was another good reason justifying that termination, namely a repudiatory breach by Seadrill in making a contractual commitment to Premier Oil?

Whether Seadrill was entitled by its letter of 27 June 2006 to give Gazprom 10 days notice of termination for non-payment of hire under paragraph 802 of the contract and then to terminate the contract by its letter of 10 July 2006 or whether, as Gazprom contends, Seadrill had agreed in correspondence and meetings after the incident that Gazprom would not be obliged to pay hire and/or Seadrill had waived any entitlement to hire or was estopped from claiming hire.

What, if any, damages is Seadrill entitled in principle to claim against Gazprom under the contract?

What, if any, damages is Gazprom entitled in principle to claim against Seadrill for breach of paragraph 502?

Whether any damages which Gazprom could recover for repudiatory breach by Seadrill are limited to nominal damages because Seadrill would always have been entitled to terminate the contract under paragraph 802?

If Gazprom would otherwise be entitled to recover substantial damages for Seadrill’s repudiatory breach, what heads of damage would be recoverable in principle?

Before setting out in detail my findings of fact, I should say a little about the view I formed of the various witnesses who gave evidence at the trial. Seadrill’s main witness was Mr Hans Van Royen who until his retirement was the managing director of the First Claimant. Gazprom was critical of Mr Van Royen’s evidence, specifically of his unwillingness to agree with statements attributed to him in minutes of meetings. Whilst there was some force in this criticism, save in relation to the minutes of the meeting of 7 March 2006 the accuracy of which are doubtful, I formed the overall view that Mr Van Royen was an essentially truthful witness.

Seadrill also called Mr Simon Johnson, its contracts manager. Gazprom was critical of both Mr Johnson and Mr Van Royen in relation to the limited evidence they had given in their statements concerning negotiations with Premier Oil. For reasons which I will elaborate when dealing with that area of the case, I did not consider this criticism fair. Overall, I formed a favourable view of Mr Johnson as an impressive and truthful witness.

The other Seadrill witnesses I can deal with shortly. Mr Burgess and Mr Woo (both of whom dealt with the repairs which are no longer relevant) I have already commented on favourably. Miss Lee and Mr Paul Aston, a partner in Holmans’ Singapore office, both of whom attended a meeting with Mr Toromyrzaev of Gazprom on 13 April 2006 gave evidence by video link. Their evidence was clearly truthful.

Gazprom’s main witness was Mr Eduard Kerusov, head of the Gazprom Project Office in India until he left in June 2008. Making every allowance for the fact that he gave his evidence in English which was not his first language, I consider that much of his evidence was argumentative, more designed to further the Gazprom case than to answer the questions he was asked in a straightforward manner. Furthermore, by the end of cross-examination it was quite apparent that some of what he had said in his witness statement (which he had confirmed as true at the beginning of his oral evidence) was simply not true. As a general rule, where his evidence and that of Mr Van Royen was in conflict, I preferred the evidence of Mr Van Royen.

Mr Alexander Nikiforov was the legal counsel to Zarubezhneftegaz (“ZNG”) a wholly owned subsidiary of Gazprom. He has been head of the Project Office in India since Mr Kerusov left. He was a more straightforward witness than Mr Kerusov, as well as being articulate and intelligent, although I felt he had a tendency to tow the Gazprom “party line” in a number of areas of his evidence, particularly concerning the meeting of 7 March 2006 and its aftermath. I disbelieved his evidence (and that of Mr Kerusov) about a phone call they and Mr Gulev alleged was made to Mr Van Royen on 3 April 2006.

Mr Emirlan Toromyrzaev was deputy head of the Project Office at the time, with responsibility for financial matters. His evidence was largely limited to dealing with the meeting of 13 April 2006. I considered that he gave his evidence in a straightforward manner.

Both sides produced witness statements from a number of other witnesses. Much of that evidence dealt with matters such as the detail of what occurred on board and was of less relevance after the admission of negligence at the outset of the second day of the trial. Specific comment only needs to be made on two of those statements.

Seadrill produced a short statement at the beginning of the evidence from Mr Gary Selbie, the well engineering manager of Premier Oil, who was involved in negotiations with Seadrill for the Rig from November 2005 onwards. Although I accept that this statement had its limitations, it confirmed the evidence of Mr Van Royen and Mr Johnson that, whilst the contract with Gazprom remained in force, Seadrill did not make a contractual commitment to send the Rig to work for Premier Oil after the completion of the repair work. I see no reason not to accept Mr Selbie’s evidence.

Gazprom served a statement from Mr Valery Gulev, director general of ZNG and, in effect, Mr Kerusov’s boss. It is clear from the evidence about the meeting on 7 March 2006 in particular that Mr Gulev played an important part in the decision making process at Gazprom. I regard the failure to call him to give evidence as a serious omission and therefore have given no weight to his evidence to the extent that it conflicts with that of Mr Van Royen.

Under the PSC, three exploration phases were to be carried out. The formal contractual position was that each exploration phase was not to exceed a specified period, subject to limited extensions of time in certain circumstances, but with any such extension being deducted from the time allowed for the following exploration phase. In fact, the second exploration phase was due to come to an end in November 2005. At all material times up until the incident in January 2006, the formal position was that Gazprom had not in fact yet obtained an extension of time beyond November 2005. Indeed, the application for an extension for six months to May 2006 does not seem to have been made by Gazprom until after the meeting of the joint operating committee of Gazprom and GAIL on 30 September 2005 (some three weeks after the contract was signed) recommended that Gazprom should request the extension from the Indian government.

It was against that background that negotiations began between the First Claimant and Gazprom for the hire of a jack-up rig, initially for another Seadrill rig SAKHALINSKAYA and then for the Rig when that other rig proved unavailable. The negotiations were initially between Mr Hans Van Royen for Seadrill and Mr Vladimir Bandurchenko, project manager for Gazprom. Mr Eduard Kerusov took over when he became head of the Project Office of Gazprom in June 2005. Although these various negotiations all concerned the hire of a jack-up rig, it is clear from the minutes of the operating committee of the project of 6/7 June 2005 that GAIL was concerned about the use of a jack up rig given the depth to which the legs of the Rig were going to be expected to penetrate, some 45 metres. GAIL was concerned that penetration to that depth with a jack-up rig carried risks which might mean drilling could not take place and that there might be problems extracting the legs without damage at the end of the drilling. In those circumstances, GAIL asked Gazprom to look for a semi-submersible unit or DP [dynamically positioned] drilling ship (both of which could drill at those depths) instead. Nonetheless, no doubt because of the shortage of such alternative units in the market at the time, Gazprom continued with negotiations for the hire of the Rig.

During the negotiations, there was a great deal of discussion and information provided to Seadrill and its representatives about the suitability of the drilling location for the Rig (and vice versa) and about the sub-soil conditions that would be encountered. Site information surveys by Elcome and a report on the seabed soil from Teknik Lengkap Geotechnics were provided to Seadrill’s marine warranty surveyors, Falconer Bryan Pte Ltd. Falconer Bryan provided Certificates and Reports of Location Approval. These included jack-up leg footing penetration curves which indicated a maximum leg penetration of 46-47 metres could be anticipated at the drilling location. The Falconer Bryan reports also advised that there was no potential for punch-through at the drilling location but warned that the boreholes upon which their prediction of leg penetration was based were terminated at 50 metres and therefore the potential for rapid penetration below 40 metres was uncertain. The reports recommended that preloading be carried out with caution and warned that delays during preloading could result in unexpected uncontrolled penetration.

A formal offer of the Rig to Gazprom was made on 29 June 2005. A meeting then took place at the First Claimant’s offices in Singapore on 13 and 14 July 2005 between Mr Van Royen, Mr Kerusov and representatives of GAIL. The minutes of that meeting were signed by Mr Van Royen and Mr Kerusov. It is apparent from the minutes that there was discussion about the suitability of the drilling location for the Rig. There was also mention of the availability of the Rig on the basis that it was expected to end its current contract at the end of September 2005 and then be available in Dubai. (Footnote: ¹)

Gazprom’s case, based on the evidence of Mr Kerusov in his witness statement is that, at that meeting, the GAIL representatives summarised for Mr Van Royen the obligations under the PSC and the operating agreement and in particular the time constraints placed on Gazprom to complete the first well. Mr Kerusov says that Mr Van Royen was informed about the need to commence drilling as soon as possible and certainly by the end of the year. It is noticeable that, although Gazprom’s pleaded case is that Mr Van Royen was told that an extension had been or was to be applied for, which would be for a maximum of a further six months expiring in May 2006 and that drilling therefore needed to be completed by the end of May 2006, that detail is not supported by Mr Kerusov’s witness statement, which is in much more generalised and somewhat vaguer terms. Also, no evidence has been called by Gazprom from either of the GAIL representatives who attended this meeting and who, according to Mr Kerusov, provided this information.

Mr Van Royen in his witness statement denied having been told any of the detailed matters pleaded by Gazprom. He was not aware of any detail other than that Gazprom needed to drill the well before a certain deadline. He did not believe that a specific date was ever mentioned to him. He had asked about the possibility of obtaining extensions but could not recall the answer. He may have been told that it was difficult to obtain extensions in India. In cross-examination, he accepted that it would not be unusual for an operator to have deadlines under his exploration licence or contract. He explained that, in his experience, having worked for Shell, if you had an accident and as a consequence you had to go to the government and ask for an extension, “99 per cent” you would get one. However, when it was put to him that he had been told at this meeting in July 2005 the date by which the well had to be drilled, he was adamant that he had not been told. All he knew was that the well had to be drilled before the monsoon came, but he was not aware of the deadline under the licence.

Although Mr Simon Rainey QC for Gazprom sought to urge upon me that I should conclude that, on a balance of probabilities, Mr Van Royen was informed at the meeting on 13/14 July 2005 about the specific time constraints under the licence and the consequent need for the drilling to complete by the end of May 2006, I am satisfied that he was not told anything of the sort, for a number of reasons.

First, in my judgment, it is inherently unlikely that, if so important a discussion had taken place about the time constraints imposed by the imminent expiry of the licence period and an alleged inability to get more than one six month extension, making it essential that drilling was completed by the end of May 2006, it would not have been carefully minuted by Mr Kerusov. Mr Rainey sought to answer this point by submitting that it was mainly a technical meeting, which is indeed a point Mr Van Royen himself made in refuting any suggestion that deadlines had been discussed. However, given that Mr Van Royen did tell the meeting that, on present information the Rig would be available at the end of September 2005 and that is recorded in the minutes, the minutes would surely go on to record the fact that Mr Van Royen was told in response about the time constraints under the licence and the consequent need to complete drilling by the end of May 2006, if anything of that kind had been said at the meeting.

Second, although much is sought to be made now by Gazprom about the difficulties of obtaining extensions of the period of the licence from the Indian government, I suspect that, at the time, Gazprom was much more relaxed and confident of obtaining whatever extension was needed. In fact, Gazprom committed itself to the contract for the Rig, even though the licence period had not been extended beyond November 2005 and the Rig could not drill the well before the expiry of the licence period. Gazprom then took delivery of the Rig and sent it to the drilling location, even though the technical position was that the licence period had expired without an extension having been granted.

Mr Kerusov accepted in cross-examination that he was confident that he would get a six month extension, but cavilled at any suggestion that a further extension beyond May 2006 would also, in all likelihood, have been granted. I was not impressed by this evidence. As with many aspects of Mr Kerusov’s evidence, it seemed to me no more than an attempt to argue Gazprom’s case. Despite his protestations to the contrary, I consider that Gazprom were confident at the time of the meeting in July 2005 that, if necessary, a further extension beyond May 2006 would be granted. The true position was that, provided the operator was able to show that it was carrying out work under the licence rather than just sitting on its hands, the likelihood was that a further extension beyond May 2006 would be granted. This is clearly what GAIL itself thought after the incident in a draft status report dated 30 January 2006 which stated:

This all makes it unlikely that Gazprom, let alone GAIL, would have volunteered to Mr Van Royen specifics of dates by which drilling had to be completed. There is some force in Mr Jacobs’ submission that they would also have been unlikely to do so because that might well improve Seadrill’s bargaining position in terms of the rates it could demand, given the flat state of the market. I accept that too much cannot be made of this point since operators may well disclose time constraints, as Premier Oil did.

Overall I consider that, in line with Mr Van Royen’s evidence, whilst he was aware of the fact that the onset of the monsoon would provide a constraint (in the sense that drilling could not take place during the monsoon), all he was told about any other constraints was in very general terms, that the operations were subject to some deadline (as he would have expected them to be), but he was not told anything specific about when the licence would expire or until when an extension would be obtained, let alone that because of those time constraints under the licence, drilling would have to complete by the end of May 2006.

Before the contract was concluded, because the design penetration depth for the legs of the Rig was much less than the expected penetrations at the drilling location, Seadrill asked the designers of the Rig, MSC Gusto, to provide a site specific assessment. MSC Gusto provided a report dated 29 August 2005, which concluded that the maximum leg penetration at the drilling location would be 47 metres and that the design constraints of the Rig would mean that, with that penetration, she could not withstand the south west monsoon. The spudcan (Footnote: ²) and leg strength was sufficient otherwise to withstand penetration to those depths. MSC Gusto’s concern was not about penetration, but subsequent retraction of the legs. The leg extraction capacity of the Rig might well be insufficient and retraction would be very difficult. It is striking, in view of the forensic furore now made by Seadrill about the risks and difficulties of preloading and penetration of the soil, that it is extraction which troubled the designers and that nonetheless Seadrill still proceeded with the contract, which was signed on 10 September 2005.

In October 2005, the parties were discussing the possibility of using the Rig to drill a second well in the same Block. Although Gazprom accepted the proposal Seadrill was making in principle and an addendum to the contract was drafted, in the event it was not signed and no agreement was ever reached. At the same time as those discussions, Mr Simon Johnson, the contracts manager of Seadrill, started negotiations for the Rig’s next fixture after the Gazprom commitment, which was to drill five wells offshore Indonesia for Premier Oil. It is clear that from the outset of those negotiations, for example from an e-mail from Mr Johnson to Mr Selbie dated 8 November 2005, what was always proposed was delivery to Premier Oil after the commitment to Gazprom (in fact at that stage on the basis the Rig would be drilling two wells for Gazprom) and indeed after a five year survey in Singapore which would take place thereafter. This was also what Premier Oil explained to the Indonesian government, for example in a letter of intent dated 1 November 2005, which referred to mobilisation of the Rig taking place after the completion of the contract with Gazprom for the drilling of two wells.

In the meantime, Seadrill had kept Gazprom apprised of the position under the existing contract with Oriental Oil. On 26 September 2005, Mr Van Royen informed Gazprom that the Rig should be ready (as in released from the Oriental Oil contract) by 10 November 2005. In response Gazprom calculated that two days would be required for towing to Dubai and five days of preparation in Dubai, with which Mr Van Royen agreed. On that basis, the Rig would have been ready for loading on the carrying vessel ASIAN ATLAS on about 17 November 2005. By mid-November 2005, this had been revised and Seadrill was predicting that the Rig would arrive on 19 November, then 21 November. In the event the Rig arrived at Dubai and jacked down on 23 November 2005. Some three days or so were spent loading sub-contractors’ equipment, during which time the cementing unit of Oriental Oil was also unloaded. However, the ASIAN ATLAS did not arrive at Dubai until 6 December 2005 and the Rig was jacked up to be loaded on board the ASIAN ATLAS on 9 December 2005.

The ASIAN ATLAS arrived at the float-off location on 1 January 2006 and the Rig was floated off at 14.20 that day, proceeding under tow to the well site. Some jacking down of the legs was carried out whilst the Rig was in tow and jacking down was completed when the spudcans touched the bottom at the well site at about 14.45 hours on 2 January 2006. The course of the preloading operation thereafter is essentially common ground and can be summarised as follows.

Ballasting for preloading commenced on 3 January 2006. At that time, the leg penetrations were 32.45 metres bow, 32.2 metres port and 33.5 metres starboard. The Rig then took 1100 metric tons of ballast on board, which resulted in an increased penetration of the bow leg, with the Rig out of level by about 2.5 degrees, tilting forward from the bow leg and thus in excess of the maximum inclination of 0.3 degrees permitted by the operations manual. The Rig’s centre of gravity was forward and in excess of the allowance of +/-0.2 metres of the centroid permitted by the operations manual. The ballast was then dumped and the Rig levelled by jacking. The preload operation was repeated with uneven penetration of the bow leg and an inclination of 1 degree. The ballast was dumped and Stage 1 was recommenced and completed.

On 4 January 2006, stage 1 and stage 2 preloading were carried out, in which the bow leg penetrated unevenly again, with an inclination of 0.6 degrees to the bow. Rather than dumping the ballast and levelling the Rig by jacking, the Rig was levelled by taking on additional ballast in the tanks in way of the port and starboard legs. The ballast was subsequently dumped. Preloading continued up to stage 2 preload which was stopped due to the rising tide. There was differential settlement of the bow leg of 0.6 metres and the Rig was unevenly trimmed. The Rig was levelled and ballast dumped.

On 5 January 2006, preloading was repeated with 2,030 metric tons of ballast. The Rig was allowed to go out of level to 0.6 degrees to the bow and 0.2 degrees to the starboard, due to the centre of gravity being forward and in excess of the +/-0.2 metres allowance. The operation continued with a further 3,730 metric tons of ballast being taken on, without levelling the Rig first. The Rig was allowed to incline 1.6 degrees to port and 1 degree to the bow, again due to the centre of gravity being forward and in excess of the +/-0.2 metres allowance, at which point the ballast was dumped and the Rig levelled. Ballasting and preloading continued until the Rig was trimmed by 0.6 degrees to port and 0.4 degrees to the stern, when all the ballast was dumped to level the Rig.

On 6 January 2006, preloading continued to stage 3. The Rig developed an increasing stern trim from 0.2 degrees to the stern and 0.35 degrees to port to 0.53 degrees and 0.5 degrees respectively by 0600 hours. No levelling off was carried out and the Rig continued to be ballasted until stage 3 was complete with the Rig out of level by 1 degree to the stern and to port. Following preloading operations on 6 January, the leg penetrations were reported by the Rig to be 46.6 metres (bow); 43.6 metres (port) and 41.8 metres (starboard). The bow leg had reached the level of penetration predicted by Falconer Bryan and did not penetrate further to any significant extent.

The unchallenged evidence of Gazprom’s Rig expert, Captain Mallett is that the only reason why the bow leg had reached that level of penetration before the stern legs was the failure of the Rig Master to control the centre of gravity of the Rig. The stern legs would continue to penetrate until they reached the same level of penetration as the bow leg, but only if the preloading operation was conducted properly. The fact that the bow leg had come to rest meant that the Rig was extremely sensitive to inclination to the stern during the further preloading and good industry practice would require that preloading to be conducted with caution to avoid leaning instability and toppling moments to stern.

However, preloading continued without any apparent regard for the need to avoid inclination to the stern. On 7 January 2006, stage 3 loading was completed with an inclination of 0.3 degrees to port and 0.2 degrees to stern, notwithstanding which stage 4 preloading was commenced at about 1600 hours. This stage would involve the highest load since the preloading began, with 5,600 metric tons of ballast and an increase in hull weight of 50%. The Rig developed a trim of 0.8 degrees to the stern and a list of 0.6 degrees to port. The ballast tank in way of the lower guide of the forward most chord of the port leg was damaged and began to leak, requiring temporary repair with a cement box.

Preloading recommenced at 0130 hours on 8 January 2006, taking on 6,435 metric tons of ballast. By 0750 hours, the Rig had taken a trim to the stern of 1.2 degrees. Rather than dumping ballast and levelling by jacking, the Rig was levelled by lowering the bow and starboard legs without dumping ballast, in excess of the safe jacking load of 9,100 metric tons prescribed in the operations manual.

At 1525 hours on 8 January 2006 preloading recommenced with stage 1 ballast being taken on and the Rig progressed to stage 4 preloading which began at 2200 hours, with the Rig trimmed to the stern by 0.2 degrees and with a starboard list of 0.1 degrees. By 0200 hours on 9 January 2006, the Rig had taken on some 1,900 metric tons of ballast and had a list to starboard of 0.4 degrees and a trim to the stern of 0.8 degrees. This was the eleventh time during the preloading operation that the Rig had been allowed to incline in excess of the maximum trim permitted by the operations manual of 0.3 degrees, in circumstances where the Falconer Bryan reports made it clear that Seadrill should comply strictly with the recommendations in the operations manual during jacking and afloat operations.

As to why the Master consistently allowed the Rig to be inclined in excess of the maximum permitted by the operations manual, the most likely explanation is that, during all previous preloading operations he had conducted in the Persian Gulf, in much shallower depths and in hard soils with little penetration, he had followed a “rule of thumb” established by his predecessor as Master, “Captain Alex”, that it was permissible to allow a trim of up to 1.5 degrees either way.

It seems that during the preloading operation, the Master paid no heed to the operations manual, but pursued the “Captain Alex” procedure as he had done before. However, at least by the time that the stage 4 loading recommenced on the afternoon of 8 January 2006, it should have been apparent to the Master that the rig was in trouble. This emerges from a graphic piece of evidence in the statement of Mr Fernandez, the marine warranty surveyor, who observed that the racks of the stern starboard leg forward chord were experiencing severe damage to the guides which he described thus:

He reported this to the Master who told him that there was no problem and did not even investigate, which seems to be a staggeringly complacent attitude in the face of tell-tale signs that something potentially serious was amiss with the preloading operation. However, far from paying heed to those tell-tale signs, the Master did not seek to dump ballast and level the Rig at 0200 hours on 9 January 2006. Rather he continued taking on ballast, with the trim to the stern and the list to starboard increasing continuously, reaching 1 degree by 0300 hours, 1.15 degrees by 0400 hours and 1.4 degrees by 0500 hours. Between 0500 hours and 0600 hours, the list increased to 2.4 degrees, by which time the legs were “bound”, in other words there was excessive friction between the leg chords and the leg guide. The continued preloading after 0200 hours had created a horizontal load in addition to the vertical load which alone should have been applied, which caused the Rig to topple by reducing the soil bearing capacity beneath the legs.

The importance of keeping the extent of inclination within the 0.3 degrees set out in the operations manual is emphasised by Captain Mallett in a passage in his report in which he is critical of the suggestion of Mr Hoyle, Seadrill’s Rig expert, that an inclination of 1 degree would be permissible. This passage merits quoting in full:

It is striking that, even if the “Captain Alex” approach of allowing inclination up to 1.5 degrees could be justified, which for the reasons given by Captain Mallett which I have just quoted it cannot, the Master continued ballasting during the early morning of 9 January 2006, exceeding that rule of thumb. This indicates an absence of proper monitoring on his part. The most likely explanation for this really emerges from the Master’s own statement, where he describes the strain and fatigue he experienced during the lengthy preloading operation, in circumstances where there was no relief Master. The impression one has is of the Master snatching naps as and when he could, hardly conducive to the proper monitoring of the operation. This was graphically described by Mr Rainey as “the fog of fatigue in the dog hours”.

There is no doubt that, if at 0200 hours or even at any time up to about 0500 hours, the Master had dumped the ballast rather than continuing ballasting and had levelled the Rig, the stage 4 preloading could have continued, with careful successive stages of preloading and dumping to keep the Rig within the levels of inclination permitted in the operations manual, enabling the stern legs to reach the same predicted penetration as the bow leg and thus enabling preloading to some 46-47 metres for all three legs to be completed successfully.

Since it is no longer alleged by Gazprom that the recovery operations after the legs became bound on the early morning of 9 January 2006 were negligent, I can deal with those briefly. The first part of the recovery operation consisted of jacking down the port and bow legs. As this operation was being carried out, at about 0915 hours on 9 January 2006, loud banging noises were heard and there were seen to be deformations in the transverse leg chords. The hull at the port leg had a sudden free fall as the leg worked free. Substantial damage was caused to the port and bow legs. The braces on those legs broke and deformation of the legs occurred, with contact between chords and guide/wear plates, causing damage to the bow leg plates.

Further jacking operations were carried out at about 1700 hours on 9 January 2006 in an attempt to balance the loads on the three legs and again in the morning of 11 January 2006 to reduce the list and trim. During those operations further leg braces broke and further contact took place between the chords and the wear plates. Similar further damage occurred during the jacking down of the Rig into the water on 16 January 2006. No further recovery attempts were made and the Rig was taken under tow on 1 February 2006, bound for the Keppel Fels yard in Singapore where she arrived on 17 February 2006.

Because it is not alleged that the recovery operations broke the chain of causation, for the purposes of the remaining issues I have to decide it is common ground that the damage sustained by the Rig during the entire period she was at the drilling location (albeit most of the damage in fact occurred during the recovery operations) was caused by the now admitted negligence of Seadrill between 0200 hours and 0600 hours on 9 January 2006.

A technical meeting took place on 23 January 2006 between representatives of GAIL and Gazprom attended by Mr Kerusov and Mr Bandurchenko. Two points emerge from the minutes of the meeting which are relevant for present purposes. First Mr Kerusov reported that the minimum period for demobilisation, repairs and remobilisation was estimated by “experts” as 2 ½ to 4 months. In his witness statement he said that he had obtained this estimate from Mr Bandurchenko, not having spoken to Mr Van Royen directly at that stage.

In cross-examination, Mr Kerusov engaged in an extremely unimpressive piece of fencing as to whether Mr Bandurchenko was sufficiently expert to give such an estimate. Mr Kerusov became very argumentative in his oral evidence as to his state of mind in January and February 2006 concerning when repairs were likely to complete. However, I am quite satisfied that the true position was that from a very early stage, before this meeting on 23 January 2006, Mr Kerusov considered it likely, on the basis of the information that he was receiving, that the Rig would be out of action for between 2 ½ to 4 months, meaning that there was no real prospect of the Rig being able to get back to the drilling location in time to complete the drilling before the onset of the south west monsoon in May 2006. Nothing he was told subsequently by Mr Van Royen would or could have led him to a more optimistic prognosis.

The second point which emerges from the minutes is that part of Gazprom’s plan of action (no doubt influenced in large measure by the first point) was not only to discuss with Seadrill the replacement of the Rig with another drilling rig, but to investigate with other drilling contractors the availability of alternative drilling units (including specifically the drilling vessel NEPTUNE DISCOVERER) to drill the first well and a second well elsewhere in the Block. This plan of action was approved by the technical meeting who also recommended that the contract with Seadrill should not be terminated until a report about the condition of the Rig and Seadrill’s further action plan had been received.

The plan of action was put into effect immediately. On the following day, 24 January 2006, Mr Kerusov sent letters to 28 drilling contractors asking about the availability of drilling units to drill the two wells in the Block. The letters said that the well location conditions were such that a drillship, semi-submersible drilling unit or mat supported jack up rig would be suitable. The fact that jack up rigs (as opposed to mat supported jack up rigs) were not mentioned suggests that Gazprom was already having second thoughts about the suitability of a jack up rig to drill the two wells.

On 25 January 2006, a meeting took place at the First Claimant’s offices in Singapore attended by Mr Van Royen and by Mr Kerusov, Mr Nikiforov and Mr Bandurchenko. Minutes of the meeting were prepared which were signed by both Mr Van Royen and Mr Kerusov. After a discussion about the incident, the meeting turned to Seadrill’s plans for fulfilling the contract and for further cooperation. Mr Van Royen reported that the estimated time for repairs was no more than 3 months, but the exact time would depend upon experts’ reports and inspection in the yard.

There was discussion about the possibility of the First Claimant providing another unit. Mr Van Royen said that it might be able to provide the semi-submersible unit GALAXY DRILLER or the drilling ship ENERGY SEARCHER in May 2006 to drill one well. He would inform Gazprom about the availability of these units on 16 February and 30 January respectively. There is no question of Mr Van Royen having committed Seadrill at this meeting to providing an alternative unit and Mr Kerusov accepted in cross-examination that the matter had not been put in that manner. Mr Rainey sought to suggest to Mr Van Royen in cross-examination that he had agreed that it was Seadrill who would provide the GALAXY DRILLER, but he denied that, emphasising the word “might” in the minutes. As he said in evidence, it was Richard Borghese of Northern Offshore who was in charge of the GALAXY DRILLER and Mr Van Royen would have needed to discuss that unit’s availability with Mr Borghese. I see no reason not to accept this evidence.

At the meeting, Mr Van Royen agreed to provide a contingency plan the following day, dealing with the further use of the Rig and payment of hire from 9 January 2006, availability of a semi-submersible or drilling ship, exchange of the Rig for such a semi-submersible or drilling ship operated by another contractor and the necessity of further geohazard surveys if the Rig were to be used on the same location.

Gazprom’s pleaded case is that at the meeting on 25 January 2006 Gazprom objected to paying hire after 9 January 2006 until the rig or a substitute was provided to perform the obligations under the contract and Seadrill agreed to draw up a contingency plan to “cover these aspects pending which it was clearly understood and agreed between the parties no payment was required”. No such objection, understanding or agreement is reflected anywhere in the minutes of the meeting and this allegation is not supported by Mr Kerusov’s witness statement. He simply says that he asked Mr Van Royen whether Gazprom should be paying for the Rig given it was now unavailable, Mr Van Royen said he wanted to discuss that with his colleagues in Norway before answering and there was no discussion of payment or invoices in any detail. Mr Nikiforov’s statement confirms this. I am quite satisfied that there is no question of Seadrill having said anything at this meeting which amounted to an agreement to forego payment or to waiver of payment.

On 26 January 2006, Mr Van Royen provided the “contingency plan” in a letter. That set out four separate proposals as follows:

Proposal to use SeaDrill 5 (Ekha) for exchange unit to other oil companies to support Gazprom in India to drill two wells as a contingency plan. We can agree on this proposal on mutual agreed terms and conditions based on the contract with other oil companies.”

As appears from the first of the four proposals in the letter, Seadrill made no attempt to hide its subsequent contract with Premier Oil (which was in fact signed on 23 January 2006). I will deal with the discussions between Premier Oil and Seadrill in more detail in the next sub-section of this judgment.

In his witness statement Mr Kerusov says that he was “surprised and disappointed” that Seadrill had already begun negotiating with other clients for the use of the Rig, before they had finalised a deal on a replacement but that Gazprom was not overly concerned about this at the time, because of Mr Van Royen’s apparent efforts to obtain a suitable substitute rig. He repeated this surprise in his oral evidence and sought to suggest that what Mr Van Royen was proposing was that the Rig should work for Premier Oil first, but that Gazprom should continue to pay for it. It is quite clear that Mr Van Royen was proposing nothing of the sort, as I am sure Mr Kerusov appreciated. Rather Mr Van Royen was putting forward a perfectly sensible suggestion that the Rig should go to work for Premier Oil during the monsoon and that the contract with Gazprom should not resume until after the monsoon.

I consider that the surprise and disappointment on the part of Mr Kerusov are entirely forensic and do not reflect Gazprom’s true state of mind at the time. If there had been any concern at the time about Seadrill entering conflicting commitments, I am quite sure Mr Kerusov would, at the very least, have telephoned Mr Van Royen to discuss what the arrangements were with Premier Oil and yet, as he accepted in cross-examination, he did not do so. I suspect that the true position was that Gazprom was not really interested in what arrangements Seadrill made for the use of the Rig after the repair work was completed. What it was really interested in was proposals for alternative drilling units, specifically, as time went on, the GALAXY DRILLER.

That letter of 26 January 2006 did not deal with any of the financial aspects, which were addressed in a subsequent letter from Seadrill of 6 February 2006. That letter (which was clearly drafted by Seadrill’s solicitors) stated that the contract would remain in force until the Rig had completed repairs, returned to the drilling location and completed drilling the first well, during which time hire at the appropriate rate would continue to be payable. Unless a contrary agreement was reached, perhaps to perform the contract using another rig or vessel, both parties remained obliged to perform according to the terms of the contract. The letter went on to set out why paragraph 606 applied and the Standby Rate was payable, contending that the sea bed was not suitable and Gazprom was in breach.

In cross-examination, Mr Kerusov claimed that when he read this letter, he thought Mr Van Royen was saying that he was not prepared to take the Rig back to the drilling location. I do not accept that evidence. Quite apart from the fact that it is impossible to construe the letter as such a refusal, there is no pleaded case by Gazprom that Seadrill actually renounced the contract in this letter or, indeed, at any later stage. Gazprom’s pleaded case is that this letter was contrary to what had been agreed at the meeting of 25 January 2006. However, since, as I have held, nothing had been agreed by Seadrill at that meeting about foregoing payment, that plea is unsustainable.

On 8 February 2006, Mr Kerusov wrote to Mr Van Royen chasing for information and contact details in relation to the ENERGY SEARCHER, the drill ship referred to at the meeting on 25 January 2006 and in the Contingency Plan. Mr Van Royen replied on 10 February that unfortunately Petronas was unable to release the vessel. Mr Kerusov then wrote to Mr Van Royen on 14 February 2006 reminding him that at the meeting on 25 January 2006, he had agreed to inform Gazprom about the GALAXY DRILLER by 16 February 2006 and asking him to do so.

On 15 February 2006, Mr Kerusov wrote to the Indian Government (the Directorate General of Hydrocarbons) informing them about the incident. At the end of the letter Mr Kerusov stated:

Although Mr Kerusov would not accept this in cross-examination, it appears from his own daily meeting notes at around this time (and specifically the notes for 24 February 2006 which were put to him in cross-examination) that with one exception, none of the drilling units he was investigating would be available in time to complete drilling by May 2006, from which it must follow that if any of those units were hired, Gazprom would need a further extension from the Indian Government beyond May 2006, as indeed happened in due course with the GALAXY DRILLER. The one exception was a jack-up rig called FORESIGHT V.

On 16 February 2006, Gazprom was informed by GAIL that it had checked with the operator Daewoo Myanmar about the likely earliest availability of the GALAXY DRILLER, which was said to be early June 2006. Mr Kerusov then spoke to Mr Van Royen on the telephone and wrote to him the same day asking Seadrill to submit an official offer for the semi-submersible GALAXY DRILLER. Whilst it would be wrong to conclude that Mr Kerusov did not thereafter keep all other options open, in case the GALAXY DRILLER fell through, it is fair to say that, after this time in mid-February 2006, Gazprom regarded the GALAXY DRILLER as the best and most attractive drilling unit. To the extent that Mr Kerusov sought to maintain the contrary in cross-examination, I do not accept that evidence.

In fact on the same day as Mr Kerusov was asking Seadrill for a formal offer in relation to the GALAXY DRILLER, he received a technical report from Mr Bandurchenko in a tabular form setting out the advantages and disadvantages of the various different types of drilling unit. It is not necessary to record the detail of this, but just one of the “Conclusions and Recommendations”:

Mr Kerusov accepted in cross-examination that he had read this report attentively and that it was one of the documents which played a part in his decision making process. In fact, even before he received the report, Mr Kerusov does not seem to have been particularly interested in replacing the Rig with another jack-up rig. One of the drilling contractors to whom Gazprom wrote on 24 January was Foresight Limited, who replied the same day, saying that the jack up rig FORESIGHT V could be made available in April 2006. It was thus the one drilling unit around which could possibly have drilled at least the first well within the first extension period. However, although the rig remained on Mr Kerusov’s list of possible units in his meeting notes until the last such note available, dated 2 March 2006, Gazprom did not contract for it, despite its early availability.

As noted above, on 16 February 2006, Mr Kerusov wrote to Mr Van Royen asking Seadrill to provide a formal offer for the GALAXY DRILLER. Mr Rainey put to Mr Van Royen in cross-examination that he had told Mr Kerusov that he was in charge of the GALAXY DRILLER, but Mr Van Royen denied this and said he had told Mr Kerusov that he was not in charge of the GALAXY DRILLER, but that he could give him the e-mail address of the person who was, namely Mr Borghese. I accept that evidence, which seems to me to be the obvious explanation for the e-mail exchange that then took place between Mr Bandurchenko and Mr Borghese (copied to Mr Van Royen and Mr Kerusov) on 20 and 23 February 2006.

Mr Bandurchenko wrote on 20 February 2006 as follows:

As Mr Van Royen explained in evidence, the second part of the email addressed to him was simply to deal with the possibility that Gazprom had not noted down correctly the email address for Mr Borghese which Mr Van Royen had given them. Mr Borghese’s response on 23 February 2006 was:

Again as Mr Van Royen explained in evidence, none of this supported the suggestion that he had told Gazprom that he was in charge of the GALAXY DRILLER, which he had not and was not. Mr Borghese simply wanted to talk to Mr Van Royen to find out exactly what Gazprom wanted, what was the location and a little more technical information before he had a meeting with Gazprom.

In their oral evidence about events in February and March (and particularly in relation to the meeting in Bangkok on 7 March 2006 and correspondence thereafter), Mr Kerusov (and to some extent Mr Nikiforov) sought to suggest that there was continued confusion at Gazprom as to who was in charge of the GALAXY DRILLER and as to whether it would be Mr Van Royen and Seadrill who would be providing that unit. I do not accept any of that evidence. It is quite clear from this email exchange that, at all material times after 23 February 2006 at the latest, Gazprom and specifically Mr Kerusov, were well aware that it was Mr Borghese and not Mr Van Royen who was in charge of the GALAXY DRILLER and that any formal offer for that unit would come from Northern Offshore, not from Seadrill. Of course, as I will discuss in more detail, Gazprom may have hoped that the GALAXY DRILLER could be provided as a substitute under the contract, but that would have required some agreement between Seadrill and Northern Offshore which, in the event, does not seem to have been an option.

Before making findings about the meeting in Bangkok on 7 March 2006, I propose to set out the evidence about the dealings between Seadrill and Premier Oil from the incident up to and including a meeting with Premier Oil on 1 March 2006 and my findings in relation to that period.

As already noted above, all the pre-contractual negotiations between Seadrill and Premier Oil were on the basis that the Rig would be delivered into Premier Oil’s service after completion of the Gazprom contract. The contract with Premier Oil so stated in terms. That contract was signed on 23 January 2006. Before that contract was signed, a meeting took place at Premier Oil’s offices in Jakarta on 20 January 2006, attended by, inter alia, Mr Selbie of Premier and Mr Van Royen of Seadrill. There are detailed minutes of that meeting. A number of matters were discussed, the details of which do not matter for present purposes. There was a discussion about the changes and upgrades to the Rig necessary to get it into an acceptable condition for Premier Oil and Mr Van Royen said that a new Rig Manager was to be appointed and that the upgrade works would be done in the yard in Singapore.

Under the heading “5 Year Survey/Shipyard Upgrades” the minutes record this:

Mr Van Royen was asked about this section of the minutes in cross-examination. He accepted that he would not have misrepresented to Premier Oil what Seadrill’s intentions were, but then denied that he had said that Seadrill did not plan to return to India to drill Gazprom’s wells, saying in effect that this was just the impression Mr Selbie had got and that he must have got the wrong end of the stick. This part of his evidence was somewhat evasive and unimpressive. I find that he did say what is recorded, since it can only have come from him and, if it had not been said or there had been any misunderstanding, Mr Van Royen would surely have picked this up when he was sent the draft minutes to approve on 24 January 2006, a few days later.

Accordingly, I find that the minutes accurately record what Mr Van Royen said. As to why he said it, the most likely explanation is that, after the incident, he did have considerable misgivings about whether the drilling location was suitable for the Rig and as to the advisability of using this jack-up rig to drill to depths of over 40 metres, way in excess of its design depth. He almost certainly also had in mind, as he said in cross-examination, that there was already a kind of dispute with Gazprom because it had not paid any of Seadrill’s invoices. If that situation continued, Seadrill might be entitled to terminate the contract.

However, saying that Seadrill did not plan to return to the drilling location is a very long way from saying that Seadrill was making any sort of contractual or otherwise binding commitment to Premier Oil, to go into its service directly after the completion of repairs, let alone that Seadrill was proposing to break its contract with Gazprom to do so. When it was put to Mr Van Royen in cross-examination that in saying what he did, he had made a commitment to Premier Oil to go directly to Indonesia after the repairs, he was very insistent that he had not made such a commitment either then or at any later stage, before the contract was terminated. His evidence was that the formal contractual position was and remained that the Rig would only be delivered to Premier Oil upon the conclusion of the Gazprom contract and that Seadrill had an existing contract with Gazprom which it would honour unless that contract were terminated or some deal was reached with Gazprom. As he put it:

I accept Mr Van Royen’s evidence on this. Furthermore, that evidence is borne out by a number of other matters. First, the terms of the Premier Oil contract itself, signed on 23 February 2006 three days after the meeting on 20 February 2006 stated under clause 1.1 as follows:

Furthermore, that contractual position was confirmed in terms by Mr Selbie’s witness statement, where he said that the contract as signed mirrored the position Seadrill had taken during the negotiations with Premier Oil, that the Rig would only be delivered to Premier Oil once the Gazprom contract had completed. Although Mr Selbie did not attend to give evidence in person and so was not cross-examined, I see no reason not to accept that evidence. A contrary conclusion would involve deciding that the lengthy contract as signed did not represent the true agreement between the parties, which had instead been made orally at a meeting three days previously. Not only is that an entirely fanciful suggestion, but it would be contrary to the entire agreement clause in the Premier Oil contract, which provided:

Second, that there had been no commitment at the meeting to send the Rig to work for Premier Oil when the repairs completed rather than back to Gazprom, is borne out by the e-mail exchange between Mr Selbie and Mr Johnson a few weeks later. On 9 February 2006, Mr Selbie asked when Seadrill "will be able to formally advise us that the SeaDrill 5 will not be going back to Gazprom in India", which demonstrates that no such commitment had been made at the meeting.

The response from Mr Johnson on 12 February 2006 was: “We truly appreciate your concern... We do not know when we will be able to conclude a deal with Gazprom (it at all). We are pushing them as hard as we can… I assure you that we are doing our best to obtain clarity and revert to Premier as soon as we know ourselves”. It is clear that what was being said was that it might not be possible to do some deal with Gazprom, in which case Seadrill could not give Premier Oil the confirmation it was looking for and that, unless and until there was a deal or the Gazprom contract had come to an end, that formal confirmation could not be provided.

I also accept the clear and convincing evidence which Mr Johnson gave about this e-mail exchange in cross-examination:

A similar exchange took place with Seadrill’s insurance brokers. On 14 February 2006, the brokers asked for advice on "approx date when Ekha will be on contract with Premier and also advise where this will be". Mr Johnson's response was: "It is difficult to say. It all hinges on whether we cut a deal with Gazprom to avoid having to go back to India to finish the well that we damaged the legs on."

The next meeting with Premier Oil took place on 1 March 2006 at Seadrill’s offices in Singapore, attended by, inter alia, Mr Van Royen and Mr Selbie. Again detailed minutes were prepared, which to an extent were “live” minutes updated from the previous meeting. Under the heading “5 Year Survey/Shipyard Upgrades” the minutes now recorded:

In cross-examination Mr Van Royen accepted that he probably did say this to Premier Oil’s representatives and that that was his thinking. However he denied that this was the formal commitment which Mr Selbie had been looking for in his email of 9 February 2006. His evidence was to the effect that Mr Selbie always understood (as indeed Mr Johnson had effectively told him in the email of 12 February 2006) that Mr Van Royen could not definitely say that the Rig was not going back to Gazprom and would come to Premier Oil instead, in the sense of making a binding commitment to that effect.

However, the signs were, from the discussions with Mr Kerusov, that Gazprom did not really want the Rig back and was more interested in having another drilling unit. As Mr Van Royen put it:

That reflects the impression Mr Van Royen reasonably had at the time, (which was in fact Gazprom’s position), that Gazprom was interested in the GALAXY DRILLER and did not really want the Rig back. However, there was always a risk that the GALAXY DRILLER would fall through and that no other drilling unit would be available in the market, in which case Gazprom would take the Rig back, faute de mieux. I am quite satisfied that, so long as that risk existed and unless and until Seadrill either made a deal with Gazprom to bring the contract to an end or otherwise terminated the contract, there was no question of Seadrill making any binding commitment to send the Rig straight to Premier Oil after the repairs.

This accords with commercial commonsense as well. Why on earth would Seadrill make a binding commitment to Premier Oil which would leave it with potentially clashing commitments, in circumstances where it did not need to do so? Seadrill’s contract with Premier Oil was clear: the Rig would not become available until it had finished work on the existing contract with Gazprom. Furthermore, Premier Oil was committed by the strict tendering process in Indonesia to taking the Rig because it had come in at the best price. Seadrill had no reason to change its contractual position with Premier Oil and thereby create potential difficulties for itself of clashing commitments.

That Seadrill did not make any binding contractual commitment to Premier Oil at the meeting is also borne out by the fact that that would have been a variation to the Premier Oil contract. By the terms of the entire agreement clause, which I quoted above, any such variation had to be in writing. It seems to me that, if Premier Oil had thought for one minute that it had a formal commitment which was contractually binding, it would have wanted that reflected in an addendum in writing signed by both parties at or after the meeting. Yet no addendum was even drafted. I consider that the true position is that, although Mr Van Royen gave ever more optimistic indications that the Rig would go straight to Premier Oil after the repairs, which was in line with the increasing likelihood that Gazprom would not have the Rig back, he never made any contractual commitment to that effect.

Returning to the ongoing discussions between Seadrill and Gazprom, on 3 March 2006 Mr Kerusov wrote to Mr Van Royen asking him to attend a meeting in Bangkok a few days later. Although Mr Kerusov did not state in the letter what was the purpose of the meeting, in his witness statement he says that the meeting was to discuss the situation with the GALAXY DRILLER, which is no doubt what Gazprom did want to discuss. Mr Van Royen on the other hand attended with a wish to discuss the outstanding invoices for hire, none of which had been paid by Gazprom.

At the meeting, as Mr Jacobs put it, Gazprom had come mob-handed. Mr Van Royen was confronted not only by Mr Kerusov and Mr Nikiforov but also by Mr Kerusov’s boss, Mr Gulev and the lady who was the head of the legal department of ZNG, Valentina Dyuzhenkova, in effect Mr Nikiforov’s boss, who attended as an observer. Neither she nor Mr Gulev speaks English and since the meeting was conducted in English, Mr Kerusov translated for them. Gazprom produced witness statements from all four dealing with the meeting, but only Mr Kerusov and Mr Nikiforov were called to give evidence.

Minutes of the meeting were prepared the following day by Mr Nikiforov but, unlike the minutes of the meeting of 25 January 2006, they were never shown to Mr Van Royen, nor was he invited to sign them. Mr Nikiforov did not really have a convincing explanation for having failed to do so. For that reason alone, the minutes would have to be approached with some caution, but there are two further reasons for doing so.

First, the covering email by which Mr Nikiforov sent the minutes to Mr Kerusov the following day refers to these (in translation) as the “edited version of the minutes of negotiations” suggesting that (i) there were other, fuller minutes also in existence (which have not been disclosed) and (ii) that these “edited minutes” were really being produced as part of some overall litigation strategy by Gazprom. However, since the email did not emerge until after Mr Nikiforov had given evidence, Mr Jacobs was not able to put any of that to him, although Mr Nikiforov had said that the minutes had been translated into English shortly afterwards for the benefit of “external advisers” who were not identified, but cannot have been Herbert Smith, who did not receive them until some time in October or November 2006.

The second further reason for approaching the minutes with caution is that Mr Nikiforov himself accepted in cross-examination that they do not follow the chronological order of the meeting. Thus he accepted that the meeting had not begun with the Communist party congress style eulogy about the efforts which had been made by both parties, attributed to Mr Van Royen in paragraph 1 of the minutes. Rather, Mr Van Royen had begun the meeting wanting to discuss the outstanding invoices.

There are essentially three disputed issues concerning the meeting, although in a sense, they merge into one:

Whether Mr Van Royen agreed that Seadrill would procure the GALAXY DRILLER as a substitute unit under the existing contract;

Whether he also agreed that until either the Rig returned to service or the GALAXY DRILLER was delivered as a substitute under the contract, Gazprom would not have to pay any of the outstanding invoices;

Whether he stated that the Rig could not return to the drilling location.

Gazprom’s pleaded case is that the meeting of 7 March 2006 is one of the occasions on which Seadrill represented that Gazprom was not required to pay the undisputed amounts under any invoice, on the basis that Seadrill would either provide the Rig or would provide an alternative drilling unit to replace the Rig under the contract and that, when that was put into service, all undisputed amounts would thereupon become payable by Gazprom. This is said to amount either to a variation of the contract or to waiver of payment or estoppel by convention. It is alleged that since Seadrill had neither provided the Rig nor the GALAXY DRILLER as a substitute under the contract by the time Gazprom terminated the contract on 16 May 2006, nothing was payable by Gazprom.

This somewhat extreme pleaded case was ostensibly supported by passages in the witness statements of the Gazprom witnesses who attended the meeting of 7 March 2006. Mr Kerusov in particular stated, by reference to the minutes of the meeting, that Gazprom thought that there was an agreement at the meeting that Seadrill would provide a replacement rig under the contact and a “clear understanding” that no payment would be made until a replacement rig had been provided.

However, the Gazprom witnesses did not ultimately support a case of variation or waiver or estoppel in their oral evidence. In cross-examination Mr Kerusov accepted that Mr Van Royen had not said that if Seadrill could not procure the GALAXY DRILLER, it would forego its right to payment of the outstanding invoices. In the end, in answer to questions from me, Mr Kerusov accepted that whatever it was that Mr Van Royen had said at the meeting, it did not amount to a binding contract.

Similarly, Mr Nikiforov accepted in cross examination that, in effect, the highest he could put it was that there was some sort of commercial understanding that outstanding invoices would not be payable until a substitute rig was provided under the contract, but he accepted that there was not a binding agreement. In other words, ultimately, the Gazprom witnesses who gave evidence could not support a case that, whatever it was they alleged Mr Van Royen had said, there was any agreement at the meeting to forego payment of outstanding invoices.

Mr Van Royen’s evidence about the meeting was that he had gone to the meeting wanting to discuss the outstanding invoices, but Mr Gulev had taken over, indicating that what Gazprom required was a substitute rig under the contract and that if Seadrill could not provide such a substitute, Gazprom would not pay the outstanding invoices. Far from agreeing this, Mr Van Royen regarded it as blackmail. Mr Van Royen was adamant that he had not undertaken to provide the GALAXY DRILLER as a substitute under the contract. All he had said was that he would help Gazprom to find another rig. The suggestion in the minutes that he had said that he owned 14% of the shares in Jet Drilling was wrong. It was Mr Fredriksen who owned the shares. All Mr Van Royen had said was that since Mr Fredriksen owned 14% of the shares in Jet Drilling (owners of the GALAXY DRILLER), maybe Seadrill could help Gazprom to get the GALAXY DRILLER. He said he would get back to Gazprom with a proposal by 14 March 2006.

My conclusion about what was said at the meeting about the GALAXY DRILLER is that initially Mr Van Royen told Mr Gulev that Seadrill could not provide the GALAXY DRILLER and that Gazprom would have to enter a new contract with Northern Offshore. Mr Gulev’s reaction was that either Seadrill provide a replacement rig as a substitute under the contract, in which case Gazprom would pay the undisputed invoices or, if Seadrill could not provide a substitute, Gazprom would terminate the contract and put the matter in the hands of its lawyers. Mr Van Royen responded by saying that he would do everything he could to get the GALAXY DRILLER for Gazprom as a substitute under the contract, no doubt motivated by the desire to get the outstanding invoices paid. However, he made no binding agreement to provide the GALAXY DRILLER as a substitute under the contract, nor did he agree that Seadrill would forego payment of its invoices until the GALAXY DRILLER was provided as a substitute under the contract. I put this interpretation of what was said at the meeting to Mr Nikiforov and he essentially accepted it. This interpretation is also supported by a number of other matters.

First, in so far as the minutes can be relied upon at all, they support the case that Mr Gulev was pressing for a “deal” under which outstanding invoices would be payable only if Seadrill provided the GALAXY DRILLER as a substitute under the contract, failing which Seadrill would have to sue for its outstanding hire. Nothing in those minutes even begins to support a case that Mr Van Royen agreed to this “deal”.

Second, the suggestion that Mr Van Royen made some binding commitment at the meeting to provide the GALAXY DRILLER as a substitute under the contract makes no sense given that only a few weeks earlier, Mr Kerusov had been told that it was Mr Borghese and not Mr Van Royen who was in charge of the GALAXY DRILLER and that at the time of the meeting, Mr Kerusov was already in touch with Mr Borghese.

Third, the letter which Mr Van Royen wrote on 13 March 2006 after the meeting is consistent with his evidence that all that he had agreed to do was to help Gazprom find another rig. In that letter he stated:

Fourth, if there had been some deal that hire would not be paid unless and until the GALAXY DRILLER was provided as a substitute under the contract, the subsequent meeting (the detail of which I refer to below) between Mr Van Royen and Mr Toromyrzaev of Gazprom in Singapore on 13 April 2006, to discuss the various outstanding invoices would have been completely pointless. Neither Mr Kerusov nor Mr Nikiforov could begin to provide a satisfactory explanation as to why that meeting was necessary or useful if, as they contended, Seadrill had “agreed” to forego the outstanding hire.

So far as concerns the question whether Mr Van Royen said at the meeting that the Rig could not be used at the drilling location, this was never relied upon by Gazprom as a renunciation of the contract. Given that, by the time that Gazprom terminated the contract on 16 May 2006, it was clearly looking for grounds to justify that termination, it is surprising that it did not rely upon this, if Mr Van Royen had really said anything as categoric as recorded in the minutes. Gazprom in fact relied upon the statement recorded as, in effect, the catalyst for wanting the GALAXY DRILLER and that was the thrust of Mr Kerusov’s evidence. However, I do not accept that evidence. As I have already held, Gazprom was intent on obtaining the GALAXY DRILLER from mid February 2006 onwards and its decision making about this was not influenced one iota by anything Mr Van Royen said at the meeting.

As to what, if anything, was said, Mr Van Royen denied that he had ever said that the Rig could not go back to the drilling location. Mr Kerusov and Mr Nikiforov maintained that he had said something to that effect, but I was not convinced by that evidence. If anything was said at all, it seems to me that the most likely was that it was to the effect that Mr Van Royen’s opinion was that the Rig would not be able to return to the drilling location. That was the evidence of Ms Dyuzhenkova as to what Mr Van Royen had said.

If that is what was said, that would have been no more than a reasonable assessment given for example the possibility that Falconer Bryan would not give the Rig location approval after the incident. In this context it is striking that when Mr Kerusov asked Falconer Bryan the direct question whether they would issue a certificate of approval for the Rig for the same drilling location, what Falconer Bryan had said in the response dated 14 February 2006 did not answer the question:

Again, if that is what was said, it cannot have come as a surprise to Gazprom, which may go a long way to explaining why, contemporaneously, no-one at Gazprom seems to have commented adversely on what Mr Van Royen had said. After all, this was no more than the view Gazprom itself had formed. The expert advice it was receiving suggested that the Rig was not suitable for the drilling location of either of the proposed wells. I have already referred to the advice received from Mr Bandurchenko on 16 February 2006. In addition, at around the time of the Bangkok meeting Gazprom received a report dated March 2006 from DMIGE who had been commissioned by Gazprom to carry out a geological engineering survey of the Block. In their conclusions they said that the soil conditions at the proposed drilling location for the second well were unfavourable for a jack-up rig and that the drilling could be performed by a semi-submersible or a drilling vessel.

When cross-examined about this, Mr Kerusov was very keen to seek to downplay the expertise of DMIGE and to make the point that the report did not altogether rule out the Rig from drilling elsewhere within the Block. However, he accepted that the report had not identified an alternative location that was suitable for the Rig and that it remained Gazprom’s intention to drill the second well in the location which DMIGE surveyed in detail until many months later when the decision was in fact taken to drill elsewhere.

I have already quoted the letter which Mr Van Royen wrote following the meeting. In his evidence Mr Van Royen said that following the meeting he contacted a number of people to find an alternative rig. In fact Gazprom was already in discussion with Mr Borghese of Northern Offshore/Jet Drilling who wrote to Mr Kerusov on 14 March 2006 with a formal offer of the GALAXY DRILLER in the following terms:

Well commitment: 2 firm

Day rate: $175,000 per day

Contract commencement: Immediately after completion of the Daewoo contract, currently estimated to be June 1, 2006.

Mobilisation and demobilisation to be agreed

Subject to:

The second subject makes it clear that Mr Borghese was proposing a new contract with Northern Offshore, not a substitution under the existing contract with Seadrill. However, as Mr Kerusov pointed out in evidence, on his copy of the offer letter he has written various points in manuscript, including “Amendment of contract with SML” from which it is apparent that he still wanted to explore the possibility of the GALAXY DRILLER coming into service as a substitute under the existing contract with Seadrill. The significance for Mr Kerusov of obtaining a substitute under the existing contract rather than making a new contract appears to have been that he would not have to go back to his senior management in Moscow to ask for approval of a new contract, in circumstances where he had nothing to show under the existing contract.

However, in terms of his negotiations with Mr Borghese he does not seem to have suggested substitution under the existing contract. In his response to the offer on 17 March 2006 he itemised various subjects including “The successful negotiation of a mutually agreeable contract”. Mr Borghese replied on 21 March 2006 asking Mr Kerusov to advise when Gazprom could make a commitment for the GALAXY DRILLER.

On 21 March 2006 Mr Van Royen wrote to Mr Kerusov in the following terms:

At the trial Gazprom was very critical of Mr Van Royen about this letter. It was suggested to him in cross-examination that the letter was contrary to what he had agreed to do at the meeting on 7 March. Since I have found he had not agreed to provide the GALAXY DRILLER as a substitute under the contract, this was a false premise, but in any event his answer was that Seadrill had helped Gazprom to find the GALAXY DRILLER. It had brought Gazprom and Mr Borghese together. He wrote the letter with a view to getting the outstanding invoices paid, which seems to me fair enough, given that Gazprom had still paid absolutely nothing by way of hire.

Similarly, in his evidence Mr Kerusov sought to suggest that this letter was inconsistent with what Mr Van Royen had agreed to do at the meeting, but the short answer to that was that if Mr Kerusov had thought that at the time, he would have written back to Mr Van Royen saying you have not done what you promised. In fact, as Mr Kerusov accepted in cross-examination, at the time he thought Mr Van Royen had helped to get the GALAXY DRILLER and he was pleased and thanked Mr Van Royen. That is a further indication that there was never the alleged agreement at the meeting on 7 March 2006.

Mr Kerusov’s evidence was that a meeting then took place with Mr Borghese in early April 2006 at which the question of taking the GALAXY DRILLER as a substitute under the existing contract was raised, but Mr Borghese made it clear that no such arrangement could be made with Seadrill. According to Mr Kerusov, he, Mr Gulev and Mr Nikiforov then telephoned Mr Van Royen on 3 April 2006 to determine once and for all whether Seadrill could provide the GALAXY DRILLER as a substitute under the contract. Mr Van Royen stated that this would not be possible. This evidence about the phone conversation was confirmed by Mr Nikiforov. Soon thereafter, another meeting took place with Mr Borghese at which he asked Gazprom to keep the negotiations with Northern Offshore confidential and not mention them to Seadrill. Mr Kerusov said he got the impression Mr Borghese did not want to do business with Mr Van Royen.

In my judgment, the evidence referred to in the previous paragraph was largely invention. At the end of the trial, after the conclusion of the evidence, Gazprom disclosed minutes of a meeting on 4 April 2006 with Mr Borghese and Mr Goddard of Jet Drilling/Northern Offshore. This seems to have been the only meeting with Mr Borghese at around this time. Although the representatives of Jet Drilling said they knew about the contract with Seadrill and appear also to have said that the GALAXY DRILLER would be provided under a separate contract not under the contract with Seadrill, there is nothing in the minutes which suggests that Mr Borghese asked Gazprom to keep the negotiations confidential.

Furthermore, the fact that any contract for the GALAXY DRILLER would be a new separate contract with Northern Offshore cannot have come as a surprise to Gazprom. The suggestion that there was some confusion in their minds as to whether Seadrill would be providing the unit as a substitute under its contract is simply not borne out by the clear statement by Jet Drilling that the contract with Northern Offshore would have no relation to the contract with Seadrill. There was nothing which required the alleged telephone call to Mr Van Royen. There was no minute or note of that call (which is surprising given that Mr Nikiforov was usually careful to keep minutes) and Mr Van Royen said he had never spoken to Mr Gulev on the telephone. I find that the alleged phone conversation did not take place and there was only the one relevant meeting with Mr Borghese.

The true position was not that Mr Borghese wanted Gazprom to keep the negotiations confidential and not disclose them to Seadrill, but that Gazprom itself did not want to involve Mr Van Royen in the negotiations with Northern Offshore. The concern appears to have been that he might do or say something which would damage the negotiations, possibly by informing Mr Borghese that Seadrill had still not been paid anything under the contract, although that is speculation on my part.

A meeting took place at Seadrill’s offices in Singapore on 13 April 2006, attended by Mr Toromyrzaev of Gazprom and Mr Van Royen and Miss Lee of Seadrill. Mr Paul Aston of Holmans, Seadrill’s solicitors, joined the meeting late. All four of them gave oral evidence about the meeting and Mr Toromyrzaev, Miss Lee and Mr Aston produced notes of the meeting. Very little is really in dispute about the meeting which is of any significance to the issues I have to decide.

It is clear that the main purpose of the meeting was to discuss the outstanding invoices. Mr Toromyrzaev had been briefed by Mr Kerusov about the outstanding invoices before he went to Singapore. As I have already noted above, the fact that the meeting took place at all is completely inconsistent with the suggestion that Mr Van Royen had agreed at the earlier meeting on 7 March 2006 that Seadrill would forego payment or anything of the kind.

The first part of the meeting was taken up with discussion of the invoices. No progress was made in relation to the first two invoices, for the period up to 9 December 2005, because Gazprom’s position was (as it remained at trial) that the commencement date under the contract and for the purposes of hire starting was 9 December 2005.

In relation to the invoices from 9 December 2005 until 9 January 2006, there was discussion about what rate should apply for some of that period and a measure of agreement was reached, at least before Mr Aston arrived and looked at the question of rates as a matter of contractual analysis. In relation to the invoices from the date of the incident until the end of February 2006, Mr Toromyrzaev did not suggest that nothing was payable at all, but rather queried the rate, specifically that the repair rate not the standby rate should apply. That issue was recognised as a disputed one.

In relation to the invoice for March 2006, Mr Toromyrzaev said Gazprom did not accept that because at the meeting on 7 March 2006, Mr Van Royen had promised to provide another rig under the contract. After that meeting Gazprom had not expected to receive any more invoices and was surprised to receive this invoice. Mr Toromyrzaev’s evidence was that this was based on what he had been told by Mr Kerusov before attending the meeting. Mr Van Royen denied that there had been any such agreement at the meeting on 7 March 2006.

At about this point in the meeting Mr Aston arrived. He was one of the partners in Holmans’ Singapore office. He was not the partner in charge of the case. That was Mr Simon Davidson, who was not available for the meeting, so Mr Aston attended in his stead. Mr Aston’s only involvement with the matter had been when Mr Davidson had asked his views about various points. He did not take instructions from Mr Van Royen before or during the meeting.

It seems that once he arrived, the atmosphere deteriorated somewhat. There is a dispute as to whether Mr Toromyrzaev or Mr Van Royen became fractious. It probably does not matter which it was, although I consider it is more likely to have been Mr Toromyrzaev, who may have felt he was being ambushed by Seadrill when its lawyer arrived at the meeting. When asked whether Gazprom could agree to pay the undisputed elements of the invoices, he said he had no authority and, according to Mr Aston, claimed to be at a disadvantage because he had not expected a lawyer to be at the meeting.

When Mr Van Royen pointed out that he had been requesting payment for months and that, although Gazprom had promised at various meetings to make payments, nothing had been forthcoming, Mr Toromyrzaev said that the Bank of Russia had issued guidelines in force since 1 January 2006, the effect of which was that the contract had to be registered with the Bank of Russia and all invoices approved by the Bank before any payment could be made. Registration of the contract was unlikely to occur before the end of April 2006. Mr Aston pointed out that it was unsatisfactory that this was the first that Seadrill had learnt of this problem with payment.

Mr Toromyrzaev also mentioned the fact that Gazprom had a budget for the drilling of the first well and could not spend the whole of that budget on the Rig without drilling having started. This was reflected in an internal note which he prepared after the meeting for Mr Kerusov. As Mr Toromyrzaev explained candidly in his evidence, the project office would be blamed by Gazprom senior management, if they had to go back for more money having exhausted the budget without achieving any drilling under the contract to date and could lose their jobs. As he put it: “this is Soviet style”. This would seem to tie in with the desire expressed by Mr Gulev and Mr Kerusov for a substitute unit under the existing contract, rather than a new contract.

Mr Toromyrzaev also seems to have used this budgetary constraint to indicate to Mr Van Royen that Gazprom could only pay about $9.9 million to Seadrill and to explore whether Seadrill would be prepared to settle for that amount. Mr Van Royen indicated that Seadrill had expected to receive more than $23 million overall under the contract and it would be difficult to persuade its board of directors and shareholders to accept as little as around $10 million. In his internal note to Mr Kerusov, Mr Toromyrzaev identifies the absence of payment under the contract as something which could create negative financial expectations for Seadrill in the market and says that this is Gazprom’s bargaining chip.

It is common ground that at the meeting Mr Aston also stated that the contract remained in force, that the Rig would be returned to Gazprom after the repairs were completed and that Seadrill would continue to issue invoices. In cross-examination of Mr Van Royen it was put to him that he had sat at the meeting when Mr Aston said this, saying nothing to contradict him, whereas it was not in fact Seadrill’s intention to return the Rig to Gazprom after the repairs, because it intended to deliver the Rig direct to Premier Oil. It seemed to me at the time and still seems to me, that the question put came perilously close to accusing Seadrill of deceit, which is a serious allegation which has never been pleaded.

However, even if the question had been a legitimate one, I see nothing sinister in Mr Van Royen having let what Mr Aston said stand. The formal position was indeed exactly as Mr Aston stated: unless and until the contract was terminated, it remained in force and if Gazprom had wanted the Rig back, Seadrill would have had to deliver it back unless a deal was negotiated. Of course the commercial reality was, as was increasingly clear to Mr Van Royen and would have become even clearer at the meeting, when Mr Toromyrzaev was exploring the possibility of a settlement on the basis that Gazprom would pay a proportion of the outstanding amount, Gazprom did not want the Rig back and had no intention of taking it back, unless the negotiations for the GALAXY DRILLER (about which Mr Van Royen was not informed) fell through.

Before leaving the meeting of 13 April 2006, I should mention that Gazprom’s pleaded case is that this meeting was another occasion on which Seadrill agreed to forego payment of its invoices or waived such payment. In the light of the notes of the meeting and the evidence about it, that contention is wholly unsustainable.

By 1 March 2006, the Rig was at the Keppel Fels yard and repair works had begun. Because Gazprom has now abandoned its case that the undertaking at the same time as the repair work of upgrade work for the Premier Oil contract and for DNV re-classification was a repudiation of the contract, it is not necessary to make any detailed findings about the course of those works. All I need record is my firm view that the additional works did not delay the departure of the Rig from the yard to any significant extent and that, since even without the additional works, the Rig would never have left the yard in time to return to the Bay of Bengal before the onset of the monsoon, any delay caused by the additional works would not have caused Gazprom any loss.

However, Gazprom still relies upon a number of matters which arose during the close liaison between Seadrill and Premier Oil concerning the upgrade work in support of its case that, albeit unknown to it at the time, Seadrill renounced the contract or repudiated it by making performance impossible. Accordingly it is necessary to examine in a little more detail the position between Seadrill and Premier Oil after the meeting of 1 March 2006.

First, on 7 April 2006 Seadrill sent Premier Oil the yard’s upgrade schedule for its review and forward planning. Mr Selbie in response mentioned various upgrade works not on the schedule and asked whether the Rig was going back to the yard after the drydock or whether it would be ready to sail directly to the field and start operations on 16 June 2006. In response Mr Larry Austin of Seadrill said that the work scope was being carried out in parallel and the plan was to complete all the work simultaneously and commence operations as soon as the yard had completed.

In my judgment, this point takes Gazprom no further than the argument about what Mr Van Royen said at the meetings on 20 January and 1 March 2006. Nothing Mr Austin said amounted to a contractual commitment and, in any event, by the time of this email exchange, Seadrill was under the impression that Gazprom did not want the Rig back, save in the unlikely eventuality that negotiations with Northern Offshore fell through. That impression accorded with Gazprom’s actual intentions, for the reasons I have given earlier.

Gazprom then relies upon the fact that, at the next meeting with Premier Oil on 27 April 2006, there was a detailed discussion about putting Indonesian crews on board the Rig whilst at the yard in Singapore, to familiarise themselves with the Rig, before it went to the location offshore Indonesia. Gazprom submitted that this was “highly significant” because, as Mr Van Royen accepted, the only reason for putting Indonesian crews on board was because the Rig was going to Indonesia.

However, the short answer to this point is that, before Gazprom terminated the contract on 16 May 2006, Seadrill had not actually changed the crew and put Indonesian crew on board. The discussions with Premier Oil were no more than legitimate preparation on the basis that the overwhelming probability was that the Rig would not be returning to Gazprom. Furthermore, since the contract with Gazprom did not specify the nationality of the crew, Seadrill would have been perfectly within its rights to change to an Indonesian crew at any time during the course of the contract.

Gazprom also relied upon discussions between Seadrill and Premier Oil about putting items of Premier Oil or its sub-contractors’ equipment on board the Rig before it left the yard, but again the answer to any reliance on that as being repudiatory conduct is that, just as with the crew, no such equipment was put on board before Gazprom terminated the contract. This remained legitimate preparation for what was overwhelmingly likely to be the next service the Rig performed.

Both Mr Kerusov and Mr Nikiforov seek to give the impression in their witness statements that during the period after the incident leading up to termination of the contract in May 2006, Gazprom was coming under increasing pressure from the Indian government because of the delay in commencing drilling. However the assertions to that effect evaporated when they were cross-examined. When asked about any meetings with the Indian government during this period, Mr Kerusov was rather vague, referring to a meeting, which he could not date, which was just a regular meeting for the purpose of discussion. That is hardly indicative of increasing pressure. He also accepted that during this period the government had never threatened to take Gazprom’s licence away. In cross-examination it emerged that Mr Nikiforov had no personal knowledge of any pressure. His statement was simply seeking to support Gazprom’s case in this context.

There is no evidence of any written communication between Gazprom and the Indian government in the period of three months after the incident (other than the letter to the Directorate General of Hydrocarbons of 15 February 2006 informing them about the incident, which I quoted in paragraph 81 above) until Gazprom wrote on 12 April 2006 requesting a further extension of time of a year beyond May 2006. There is also no record of any meeting. The truth is that there is no evidence of any pressure from the government, increasing or otherwise, nor did the delay which had occurred cause any problem with obtaining a further extension of time from the Indian government.

Gazprom sent its marine engineering/naval architecture expert Mr Gary Hogg to the yard to inspect the Rig on 23 April 2006. Evidently Seadrill’s personnel at the yard co-operated with him and Gazprom thanked Seadrill for that co-operation in a letter of 27 April 2006. Although he had had discussions previously with Mr Kerusov, he was instructed by Herbert Smith. Privilege was claimed over his initial report, although Seadrill made an understandable application for its disclosure, after Mr Kerusov asserted, rather surprisingly, in cross-examination, that the report had not been prepared for the purposes of contemplated litigation. In the event, rather than argue the point further, Gazprom sensibly waived any privilege and the report was disclosed. It is not necessary to refer to it in any detail save to note (i) that Mr Hogg refers to the DNV enhancement work and says that he does not know whether that additional work has had any impact on the damage repair work, either as regards time or material costs and (ii) that he reviewed the daily log on board in relation to the preloading operation and concluded that the preloading had been conducted in an incorrect manner.

On 3 May 2006, Mr Van Royen wrote to Mr Kerusov with a proposal to provide the GALAXY DRILLER as a substitute under the contract, but subject to Gazprom paying within 7 days the total amount of outstanding hire invoiced to date of in excess of $14 million. Mr Van Royen’s evidence was that the idea for this proposal had come from Seadrill senior management in Norway. It obviously held no attraction for Gazprom.

On 16 May 2006, Gazprom wrote to Seadrill terminating the contract on the basis of three alleged repudiatory breaches by Seadrill: (i) negligent operation of the rig during the preloading in breach of paragraph 502; (ii) failure to have insurances covering the incident in breach of paragraph 1001 and (iii) the carrying out of extensive upgrade works at the yard for DNV reclassification, which had not previously been disclosed to Gazprom.

The timing of that letter is unlikely to have been coincidental. From the minutes of the meeting with Northern Offshore on 4 April 2006 which were disclosed after the evidence had concluded, it emerges that Gazprom and Northern Offshore had discussed the possibility of a contract being signed during the period 17-20 May 2006 when Mr Gulev and Mr Kerusov were due to be in Houston on business. In the event, a letter of intent was signed by Mr Kerusov on 19 May 2006.

On 29 May 2006, Holmans wrote to Gazprom in response to its letter of 16 May 2006 refuting the suggestion that the incident was due to Seadrill’s breach of contract and denying any repudiation. That letter stated that Gazprom’s wrongful termination was itself repudiatory, but went on to state that Seadrill was not terminating the contract for repudiation and that Gazprom remained liable to perform its obligations under the contract, including to pay outstanding hire.

On 26 June 2006 the contract for the GALAXY DRILLER was concluded. On 27 June 2006, Holmans wrote to Gazprom giving ten days written notice under paragraph 802 of the contract that Seadrill would terminate unless Gazprom paid all sums due and owing to Seadrill. On 1 July 2006, Gazprom replied maintaining that its termination letter was valid and that the contract had been terminated. On 10 July 2006, Holmans wrote saying that Gazprom’s contractual analysis was incorrect and that Seadrill was terminating the contract under paragraph 802, alternatively by acceptance of Gazprom’s own repudiatory breach.

The dispute between the parties then crystallised and the Claim Form was issued on 3 August 2007.

The dispute between the parties as to the correct construction of the contract extends far and wide in terms of the provisions of the contract, but what really matter for the purposes of the major issues in the case are three sets of provisions:

Article IX, specifically paragraphs 910 and 911, which Seadrill contends have the effect of precluding any liability on the part of Seadrill in damages or otherwise for negligent performance of the preloading operation;

Paragraph 606, which Seadrill contends has the effect of imposing on Gazprom both the risk and liability for what occurred on 9 January 2006;

Paragraph 701, which Seadrill contends entitles it to be paid hire throughout the contract after 9 January 2006, notwithstanding its negligence or breach of contract and precludes Gazprom from recovering back any such hire as damages.

Before considering these provisions in turn, I should refer briefly to the commercial background to the IDDCO form as developed by the IADC. Both parties relied upon this background in support of their respective cases on the construction of the contract. This consisted primarily of information and articles (specifically by Calkins, Pugh and Moomjian (Footnote: ³)) from the United States concerning the development of the form (particularly the amendments made to the original form in 1989, now reflected in paragraphs 910 and 911) and its use, particularly in the offshore drilling industry in the Gulf of Mexico.

Mr Jacobs relied upon this background in support of his case that the form as it now stands (specifically paragraphs 910 and 911) is intended to allocate all risks encountered in the offshore drilling industry between the parties irrespective of fault and to obviate the need for any factual enquiry concerning fault in relation to any particular incident. Mr Rainey on the other hand relies upon the fact that the disputes which have arisen under this form and other drilling contracts have been primarily litigated in states such as Louisiana and Texas, which might be described as hostile to indemnity provisions which entitle a party to an indemnity against the consequences of its own fault or negligence, without the use of clear express words. He contends that it is to ensure that the indemnities for which Article IX provides are “bombproof”, as he put it, from attack in such hostile jurisdictions, that the “magic” or “talismanic” language now contained in paragraphs 910 and 911 was introduced.

Without in any way wishing to belittle the industry and effort which the parties and their legal advisers have put into researching the history and development of the IDDCO form, I consider that this material is of limited assistance for the following reasons. First, although this is apparently the first time that this form has been considered by the English courts (whereas the form has been considered, albeit in a limited number of cases, by federal courts in the United States), the contract in the present case (unlike in any of the cases considered by the courts of the United States) is governed by English law. Whilst the history and development of a standard form contract can legitimately be considered as part of the factual matrix or commercial background against which the contract is construed, it cannot be used to subvert the normal English law principles of construction and arrive at a construction of the contract which would not be legitimate applying those principles of construction.

Second and closely allied to the first reason, one must approach with some caution both commentaries on the form by American academics and cases on the form decided by the United States courts, since the approach of both is inevitably informed by United States systems of law and principles of construction which are not necessarily the same as in England. Mr Jacobs may well be right, both that the United States courts have applied federal maritime law (rather than the state law of the states in which the federal courts were sitting, Louisiana and Texas) in construing this form and that the approach of federal maritime law to construction of contracts is closer to that of English law than are the law of the states of Louisiana and Texas. Nonetheless, even federal maritime law is not identical to English law and, judging by the case upon which Mr Jacobs placed particular reliance, (the decision of the District Court for the Eastern District of Louisiana and the Court of Appeals of the 5^th Circuit in Louisiana Land and Exploration Company v Offshore Tugs Inc 1993 WL 732429 (E.D. La); (1994) 23 F. 3d 967), may well involve the application of principles which, even if not alien to English lawyers with experience of American decisions, are by no means identical to those applied by English courts. I will consider that decision in detail below.

Third and perhaps most importantly, it does not seem to me that either the commentaries or the American cases (including Louisiana Land) are considering directly the specific and fundamental issues on the IDDCO form which have been raised in the present case, so that only limited assistance can be derived from them in any event. It is well recognised that offshore contracts of one kind or another (be it drilling contracts or, for example, towage contracts) contain risk allocation provisions which allocate certain risks between the parties irrespective of fault. However the existence of that commercial approach does not assist much in the construction of this particular contract and, in particular, in deciding whether, as Seadrill contends, the risk allocation provisions in this contract are all-encompassing and preclude any claim for damages.

The battleground in relation to paragraphs 501 and 911 concerns whether their effect (individually and cumulatively) is to preclude any liability on the part of Seadrill for what is now its admitted negligence during the preloading operation between 0200 hours and 0600 hours on 9 January 2006. Gazprom’s case as to Seadrill’s liability for that negligence would (were it not for the issues concerning paragraphs 501 and 911) be a conventional one as a matter of English law as follows: (i) paragraphs 401 and 502 impose obligations on Seadrill to perform the services under the contract (which admittedly include the preloading operation) and to operate the Rig; (ii) although (despite the heading “Contractor’s Standard of Performance” to paragraph 501) the contract does not impose any express standard to which those obligations are to be performed, as a matter of law it is to be implied into the contract that those obligations to provide services will be performed with reasonable skill and care either at common law (see Lewison: The Interpretation of Contracts 4^th edition para 6.17) or by virtue of section 13 of the Supply of Goods and Services Act 1982, unless such implication would be contrary to the express terms of the contract, which Gazprom submits it would not; (iii) given that Seadrill’s negligence caused the incident, Seadrill was in breach of those obligations under paragraphs 401 and 502 to use reasonable skill and care in performing the preloading operation; (iv) in the normal way, Seadrill is liable to Gazprom in damages for losses suffered by Gazprom as a consequence of that breach. I leave out of account for the purposes of the present analysis of the correct construction of the contract, Gazprom’s further argument that the breach was repudiatory, entitling it to terminate the contract, an issue to which I will return later.

Seadrill contends that this conventional analysis is contrary to the intent and correct construction of the contract, which is that, save for those instances in Article IX where Seadrill as contractor is under a liability or has assumed a risk, none of which is applicable here, Seadrill is under no liability to Gazprom under paragraphs 401 and 502 for breach of contract or negligence. The principal prop of this argument is paragraph 911, headed “General Intent” which provides:

Mr Jacobs submits that this demonstrates that this form of contract is an exclusive contractual code, pursuant to which save as expressly provided in the identified provisions of the contract (namely Article IX and paragraphs 606, 608 and 1310) neither party is liable to the other or assumes any risk vis-à-vis the other, a code of assumption of risk which means that disputes can be determined easily and quickly without any need for detailed factual enquiries such as those in which Gazprom wishes to engage in this case.

He submits that, in the first sentence, the parties are recognising all the losses and liabilities to which the hazardous offshore drilling industry can give rise, not just those enumerated earlier in Article IX, hence the catch-all phrase “and other losses and liabilities”. Accordingly, when the second sentence continues: “It is the intention of the parties hereto that the provisions of this Article IX and Paragraphs 606, 608 and 1310 shall exclusively govern the allocation of risks and liabilities of said parties without regard to cause…”, the correct construction is that the identified provisions and only the identified provisions determine the allocation of all and any risks and liabilities under the contract. There is no room for other liabilities outside this exclusive code (such as liability for financial losses as a consequence of breach of paragraphs 401 and 502), particularly given the use of the words “shall exclusively govern”.

Furthermore, Mr Jacobs contends that this analysis of the scheme of the contract is borne out by paragraph 501. The effect of that provision is that the risk of any incident which occurs (such as in the present case) falls on the Operator unless some provision of the contract expressly allocates it to the Contractor. The obligation upon which Gazprom relies, that Seadrill should use reasonable skill and care in the preloading operation, is not one “specifically assumed” under the contract and so cannot be implied. Alternatively, Seadrill contends that, even if there were such an obligation under the contract, the effect of paragraph 501 (both standing alone and in conjunction with paragraph 911) is that Seadrill is not liable in damages for breach of that obligation because paragraph 501 also provides that the only “liabilities” of the Contractor are those “specifically assumed”. No such liability is specifically assumed anywhere in the contract and in any event such liability would be inconsistent with paragraph 911.

The effect of this analysis of the contract is that although provisions such as paragraph 502 may be described as “obligations” (indeed the provision is part of Article V headed “Contractor’s General Obligation”), unless mis-performance of the relevant obligation has a consequence for which the Contractor is liable or assumes the risk under Article IX (for example if Seadrill personnel had been killed during the negligent preloading operation, that would be Seadrill’s responsibility under paragraph 903), then the Contractor is not liable in damages for breach of the relevant obligation.

Mr Jacobs challenges the suggestion that this analysis renders the contract a nudum pactum, not least because he accepts that the risk allocation regime would not protect Seadrill in cases of complete refusal or failure to perform the obligation under paragraph 401 or 502 at all, as opposed to mis-performance. In support of the submission that this approach to the risk allocation regime is permissible as a matter of English law, he relies on the recent decision of Teare J in The “A Turtle” [2009] 1 Lloyd’s Rep 177, considering the risk allocation regime of clause 18 of the “Towcon” form, where the learned judge considered that, although the relevant provision exempted the tug owners from liability for negligent performance of the towage contract (including the unseaworthiness of the tug), it would not exempt them from complete non-performance of the contract.

I agree with Mr Rainey that, since this is an English law contract, the starting point is that the court must construe the contract as a whole, without preconceptions, but applying established English law principles of contract construction. One of those principles is that clear words are necessary before a court will hold that a contract has taken away rights or remedies which one of the parties to it would have had at common law: Lewison paragraph 12.19, citing, inter alia, Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Limited [1974] AC 689 (a case that is also of considerable relevance in relation to the correct construction of paragraph 701, to which I refer below).

In that case Lord Diplock sated the principle at 717H and 718E as follows:

Notwithstanding the attractive and thought-provoking submissions advanced by Mr Jacobs, to the effect that paragraph 911 amounts to an exclusive code of risk allocation, precluding altogether liability for breach of any obligation in paragraphs 401 and 502 as regards the performance by Seadrill of the services under the contract, I do not consider that paragraph 911 is expressed in clear and unequivocal terms to that effect.

As regards the first sentence of the provision, since the words “bodily injury, death, damage or loss of property, well loss or damage, pollution, loss of well control, reservoir damage” are clearly referring to the risk allocation provisions set out in paragraphs 901 to 907, I accept Mr Rainey’s submission that the words “and other losses and liabilities” are referring to patent liabilities and consequential losses referred to in paragraphs 908 and 909, rather than to any conceivable losses or liabilities which might occur. This points strongly to the provision being designed to do no more than make clear that Article IX is a self-contained exclusive code of risk allocation as regards those matters with which it is dealing, such as death, personal injury and property damage, but is not intended to affect liability for breaches of the contract (by either party) which fall outside what Article IX covers.

Even if that construction of the first sentence were wrong and the words “and other losses and liabilities” encompassed every conceivable loss or liability, in my judgment the second sentence is still not a clear and unequivocal agreement that, apart from under the identified provisions, there will be no liability on either party for breach of the contract. Rather it seems to me that the words: “It is the intention of the parties hereto that the provisions of this Article IX and Paragraphs 606, 608 and 1310 shall exclusively govern the allocation of risks and liabilities of said parties without regard to cause” are making it clear that in relation to those matters which are covered by those identified provisions, they shall exclusively govern the allocation of risks and liabilities. The words are not intended to mean that there will be no liability under the contract in respect of other matters not touched on by those provisions, for example liability for direct financial losses (i.e ones not excluded under paragraph 909) caused by a breach of the obligation in paragraph 502. Furthermore, I do not consider the words are apt to have that meaning, let alone clearly and unequivocally to that effect.

If the intention of paragraph 911 had been that all liability of either party for breach of the contract was excluded, other than as provided by Article IX and paragraphs 606, 608 and 1310, then it would have been very easy to have said so in express terms, which the second sentence of paragraph 911 does not. Furthermore, whilst if clear and unequivocal words to that effect had been used in the provision, the fact that the provision was contained in Article IX would not be determinative the other way, the fact that this provision is contained within Article IX suggests that it is intended to deal with the exclusivity of the internal code within Article IX and the related provisions such as paragraph 606. If it had been intended to have the far reaching effect for which Seadrill contends, one would have expected it to be in its own separate Article in the contract.

Similarly, I agree with Mr Rainey that paragraph 501 does not clearly and unequivocally have the exclusionary effect for which Seadrill contends. The answer to the point that the implication of an obligation to perform the services with reasonable skill and care was not “specifically assumed” is that this is a misconception. What was “specifically assumed” for present purposes was the obligation to operate the Rig. As a matter of English law, a necessary incident of that obligation is that the Rig will be operated with reasonable skill and care. What is “specifically assumed” is the obligation to operate the Rig, together with that legally and necessarily implied incident of it: see Exxonmobil Sales & Supply v Texaco Ltd [2004] 1 All ER 435 at 441 paragraph 27 per Nigel Teare QC, Deputy High Court Judge. There is nothing in the express terms of the contract, properly construed, which is inconsistent with the implication of a standard of performance of reasonable skill and care.

Once the contention by Seadrill that paragraph 911 is an all-encompassing exclusive code regulating liability is rejected, its alternative argument under paragraph 501 that no liability has been assumed by Seadrill, if it performs its obligations under paragraphs 401and 502 negligently or otherwise in breach of contract, must fail for the same reason. Breach of the obligation under paragraph 502 will give rise to a potential liability in damages in accordance with the normal principles of the law of contract.

One other matter on which Mr Jacobs relied in support of Seadrill’s construction of paragraphs 911 and 501 is the insurance provision in paragraph 1001:

The problem with this argument is that one simply does not know exactly what insurances were negotiated and on what terms or whether the fact that Seadrill did not take out such additional insurance was attributable to its construction of the contract or (for example) because additional insurance cover would have been prohibitively expensive. I accept Mr Rainey’s submission that to allow this point to influence the correct construction of the contract would be to let the “tail wag the dog”. It seems to me to come perilously close to determining an issue of construction by reference to the subjective intentions of one of the parties, which is never permissible.

Before leaving the issue of construction of paragraphs 501 and 911, I should deal with the only American authority which (according to the exhaustive researches of Mr Jacobs and his junior, Mr Eaton) has analysed the IDDCO 1989 form of contract in any detail: Louisiana Land. In that case, whilst being positioned in the Gulf of Mexico, the Contractor (Rowan)’s jack-up rig had collided with a wellhead owned by the Operator (Louisiana Land), which had apparently been drilled by the Contractor itself. Louisiana Land brought a general maritime claim against Rowan. Rowan issued a motion for summary judgment to strike out the claim, relying on paragraphs 606 (on the basis that the wellhead was an “obstruction” within the area of the drill site) and 911 in support of its case that the risk of any damage arising from the accident fell on the Operator under those provisions.

The District Court records that Louisiana Land sought to counter that conclusion by alleging that paragraph 502 placed responsibility for positioning the rig on the Contractor and accordingly Rowan should be held liable for the damage. As Mr Rainey said, it is not clear what the precise cause of action was said to be or even if an allegation of breach of contract was being made. It does appear from one passage in the judgment and from a footnote to it, that it was being contended that the collision was due to the negligence of Rowan.

At all events, whatever the juristic basis for the alleged liability, the District Court rejected the argument as follows:

The Court went on to hold that, even without paragraph 606, the terms of the contract imposed a duty on Louisiana Land to indemnify Rowan for the accident, by virtue of paragraph 901. The Court said:

The decision of the District Court was upheld by the Court of Appeals for the 5^th Circuit. The Court of Appeals said this (at 23 F. 3d 969):

The Court of Appeals went on to dismiss an argument by Louisiana Land that the District Court had erred by holding that the general liability provision in paragraph 901 required Louisiana Land to indemnify Rowan despite the more specific provisions of paragraphs 502 and 606 specifically addressing the responsibility of the parties during positioning of the rig. The Court of Appeals said:

Although the District Court and the Court of Appeals for the 5^th Circuit in that case were determining the questions of construction by reference to federal maritime law, Mr Jacobs submits that there is no discernible difference between the approach they adopted and the approach which an English court would adopt and that the reasoning, which bears out his analysis of paragraphs 501 and 911 (and specifically of paragraph 911 as an exclusive code of risk allocation) is persuasive and correct. He contends that four propositions, with which I will deal in turn, can be derived from that case.

First, that paragraph 911 was treated as an important provision, containing an exclusive code. Although it is true that some passages in the judgments (for example the passage from the Court of Appeals quoted at paragraph 196 above) can be read that widely, I consider that the context in which they were considering Article IX was that, where an incident falls squarely within one of the paragraphs of that Article or say paragraph 606, then the risk allocation provisions govern exclusively. The US courts were not saying that those provisions would govern exclusively, as regards a breach of a separate provision of the contract, not within the identified paragraphs, not least because that was not an issue the courts had to decide, given that the case was clearly within paragraph 606.

Second, that negligence was squarely alleged. Notwithstanding Mr Rainey’s submission to the contrary, it does seem clear from the judgment, and specifically footnote 4, that Louisiana Land was alleging negligence, although the court did not consider it an answer to the summary judgment application, since paragraph 901 required Louisiana Land to indemnify Rowan irrespective of the latter’s negligence. However the fact that negligence was alleged in that case does not make the courts’ reasoning on the construction of the contract any more compelling.

Third, Mr Jacobs submits that the case for the Operator was being put on the basis of paragraph 502 giving rise to an obligation to pay damages. It seems to me that is reading far too much into what Louisiana Land was contending in that case. There is no mention of breach of contract in the judgments, let alone of such breach leading to a liability in damages. The rather elliptical passage where the District Court records Louisiana Land’s contention suggests no more than that it was being said that responsibility equated with liability. There does not seem to have been any analysis based on breach of contract.

Fourth, he submits that the courts decided that paragraph 502 was only allocating tasks and that liability was dealt with elsewhere in the contract, in other words within what Mr Jacobs would have as the exclusive code of Article IX. It is true that the passages from the judgment which I have set out above, taken out of context, might be thought to support such an argument, but as I have already held, I do not consider that the courts were looking at the issue of construction of paragraph 502 generally. Rather they were concerned with the narrower question, given that the incident was within paragraph 606, could the Operator nonetheless rely on paragraph 502 to trump paragraph 606 and shift liability for the incident onto the Contractor. Perhaps unsurprisingly, given the clear terms of the applicable indemnity provisions, the court concluded that those provisions prevailed over paragraph 502.

However, even if Mr Jacobs were right in his submission that the US courts in Louisiana Land did decide that paragraph 502 was merely allocating tasks without any concomitant liabilities, I would decline to follow that line of reasoning on the basis that it is contrary to English law. In the absence of clear and unequivocal words excluding such liability, English law is that breach of an obligation or responsibility such as paragraph 502 gives rise to a liability in damages. There are no such clear and unequivocal words in this contract.

Paragraph 606 of the contract provides as follows:

As I noted at the outset of this judgment, Seadrill’s primary pleaded case that there was a decrease in the increase in strength of the soil at certain depths and hence “faulty bottom conditions” has now been abandoned. However Seadrill still maintains its case that Gazprom is responsible for the incident under paragraph 606, on the basis that although there was no particular defect in the soil through which the preloading was taking place and that soil exhibited its normal characteristics, nonetheless, because the Rig inclined as it did on the morning of 9 January 2006 and suffered damage in consequence, the seabed conditions proved unsatisfactory to support the Rig within the meaning of those words in paragraph 606. This is said to be so, despite the fact that it is now admitted by Seadrill that the Master was negligent between 0200 hours and 0600 hours on 9 January 2006 in continuing to ballast and that such negligence was a cause of the incident and consequent damage. Given that, as it seems to me, it necessarily follows from the admission that had the Master acted with reasonable skill and care, the incident would not have occurred, at first blush it is somewhat surprising that Seadrill still maintains that the seabed conditions were a cause of the incident.

The basis for Seadrill’s argument is that the obligation of Gazprom to indemnify Seadrill under paragraph 606 has to be read with paragraph 910 (a) which provides:

Accordingly, Mr Jacobs submits that because the Rig inclined and suffered resulting damage in the soft soil conditions through which the preloading operation was taking place, the seabed conditions proved unsatisfactory to support the Rig. It is no answer to say that it was the negligence of the Master which caused the inclination of the Rig and the damage, because paragraph 910 (a) makes it clear that the indemnity against any “claims” etc under paragraph 606 is to be provided to Seadrill without regard to the cause thereof, even if the cause is breach of contract or “sole” negligence of Seadrill.

It was accepted by Mr Jacobs that a necessary consequence of that construction of paragraph 606, was that in every case where a drilling unit inclined and incurred damage whilst preloading or during drilling, the seabed conditions would have proved unsatisfactory to support the unit and the Contractor would be entitled to an indemnity from the Operator, even if the inclination was caused by the negligence of the Contractor and, but for that negligence, the inclination and damage would not have occurred. The only qualification which Mr Jacobs was prepared to make concerned a situation where a rig’s legs were sitting on rock and the rig toppled over through the negligence of the Master. In that situation, he accepted that it could not be said that the seabed conditions had proved unsatisfactory to support the unit. However I am not sure that necessarily follows. If, for example, it could be said that the rig would not have toppled over or suffered damage if the ground on which it was resting had been softer, why on the basis of Seadrill’s construction should it not be said that the seabed conditions had proved unsatisfactory to support the unit?

Consideration of the extremes to which Seadrill’s construction leads inevitably creates doubt as to whether the construction can be correct. Attractively though Mr Jacobs put his case for this construction, I cannot accept it. In my judgment, the correct approach to paragraphs 606 and 910 is as follows. The first question in any case is to consider whether there was an “obstruction” within the drilling site, or “faulty bottom conditions” or “seabed conditions [which] prove unsatisfactory to support or moor the Drilling Unit”. I agree with Mr Rainey that this is an objective question, which may involve a factual enquiry, as demonstrated by one of the grounds upon which Louisiana Land sought to resist summary judgment in that case, by raising a factual issue as to whether there was an “obstruction”.

There is also some force in Mr Rainey’s point that the use of the word “support” suggests that this provision is focusing on seabed conditions at the end of any preloading process, when the Rig’s legs are being supported by the seabed, whereas during the preloading when, by definition, the legs are being driven through the soil, the concept of the soil “supporting” the Rig is hardly apt. Having said that, it seems to me clear that overall paragraph 606 is intended to provide an indemnity to the Contractor in circumstances where an incident occurs during the preloading, which damages the Rig and which is attributable to some defect in the soil through which the preloading is taking place, for example had the defect in the soil pleaded by Seadrill in this case in fact existed. Whether that is better analysed as “faulty bottom conditions” or “seabed conditions which prove unsatisfactory to support” may be debatable.

However, it is not necessary finally to decide that question, because where there is no defect in the soil but only perfectly normal soil conditions and the real reason why the Rig inclined was the negligence of the Master, it seems to me a complete distortion of language to say either that the bottom conditions were faulty or that the seabed conditions have proved unsatisfactory to support the Rig, in circumstances where the preloading operation would have continued without incident, had it not been for the negligence of the Master. In terms of the initial objective enquiry or what Mr Rainey described as the issue whether the Contractor can get itself within the “gateway” of paragraph 606, the bottom conditions were not faulty and there was nothing unsatisfactory about the seabed.

I agree with Mr Rainey that paragraph 606 is to be interpreted as a “sound location” provision. Indeed that is how Mr Jacobs himself described it in his oral opening of the case, by reference to the commentaries of Messrs Pugh and Moomjian. In other words, the intention of the provision is that the operator is to provide a location for drilling which is “sound” and he bears the consequences of the location being “unsound”. In the present case, the location was perfectly sound and safe and the problem which occurred only occurred because Seadrill’s personnel mishandled the Rig at that location. No amount of rhetoric in Seadrill’s closing submissions about “soil being soil” and about soil having problems and about the overall difficulty and risk of preloading to the depths to which this Rig was descending, can alter the stark facts: there was nothing wrong with the soil, which behaved exactly as all the geotechnical data anticipated it would, increasing in strength with depth on a linear basis and, had it not been for the negligence of the Master, the preloading would have concluded without incident.

As for paragraph 910(a), whilst it is of course correct that the contract has to be read as a whole and paragraph 606 must be read with 910(a), it is reading too much into paragraph 910(a) to construe it, as Seadrill does, as meaning that Gazprom has to indemnify Seadrill, where it is only Seadrill’s negligence which has caused the incident and the location was sound. The correct construction of the provisions together is that, if, after the objective factual enquiry, it is shown that there was an obstruction or that the bottom conditions were faulty or that the seabed conditions had proved unsatisfactory to support the drilling unit, (i.e. the contractor has brought itself within the gateway and shown that the location was unsound) then it is no answer to the contractor’s claim for an indemnity under paragraph 606 for the operator to say that the incident was caused by the negligence or breach of contract of the contractor. Thus, if Seadrill had been able to prove the defect it alleged of a decrease in the increase in strength of the soil as a cause of the incident, it would have been no answer for Gazprom to say that the negligence of the Master was also a cause of the incident. However where, as here, there was no defect in the soil and it simply exhibited the characteristics which it was expected to, the soil was not a cause of the incident and hence of the damage. The only cause of the incident and the damage was the negligence of the Master and paragraph 606 is not engaged.

Paragraph 701 is concerned with the contractor’s entitlement to be paid hire (at whatever is the appropriate rate of the various rates for which the contract provides) throughout the contract, irrespective of whether there has been breach of contract or negligence by the contractor. It provides as follows:

Seadrill submits that the effect of this provision is not just that Gazprom was obliged to continue payment of hire, notwithstanding any breach of paragraph 502 or negligence by Seadrill in relation to the incident, right through until the contract was terminated, but also that Gazprom would be precluded from recovering back any such hire which it had paid, by way of damages for breach of contract. Since Gazprom has not in fact paid any hire at all, the effect of the provision is thus to oblige Gazprom to pay hire now, at the applicable rate, to Seadrill for the whole period of the contract. Mr Jacobs submits that the parties cannot have intended that the operator would have to pay, but would then be entitled to recover the hire as damages by proving the very negligence or breach of contract which the provision renders irrelevant in the first instance. This would render the provision meaningless.

Mr Rainey disputes that this construction renders the provision meaningless. The provision is a variant of the sort of “no set-off” or “pay now, dispute later” clause often found in commercial contracts such as charterparties or construction contracts, which are designed to maintain the cash flow of the party providing the relevant services during the contract, but which do not prevent the other party in an appropriate case from later recovering hire or other monies paid out, as damages for breach of contract. Mr Rainey emphasises the words “during the term of this Contract” in paragraph 701 and submits that clear and unequivocal words would be needed to exclude the operator’s right to recover hire paid out as “wasted costs” damages, which are absent from this provision.

I have no doubt that Gazprom’s construction of paragraph 701 is the correct one. This is another area of the case where the principles recognised by Lord Diplock in Gilbert-Ash come into play. On the hypothesis that Gazprom had paid hire from 9 January to 16 May 2006, when it terminated the contract, Gazprom would be able to contend that, as a consequence of Seadrill’s breach of paragraph 502, that hire had been wasted, as it had not received the expected drilling services under the contract. As a matter of well-established principle, it would have been able to recover that wasted hire as damages for breach of contract, unless there were clear and unequivocal words in the contract to the effect that the right to hire was absolute and there would be no entitlement to recover the wasted hire as damages.

There is nothing in paragraph 701 which even begins to have that effect, let alone clear and unequivocal words to that effect. Furthermore, in my judgment there is nothing in Mr Jacobs’ emphasis on the absence of an off-hire clause in the contract. Off-hire clauses operate in identified circumstances, usually irrespective of breach of contract, and the ability or inability to put a vessel off-hire under such a clause tells one nothing about whether hire paid will subsequently be recoverable as damages for breach of contract, in relation to something which may not have been an off-hire event. The practical consequence of the conclusion that paragraph 701 would not preclude a claim by Gazprom to recover hire paid, after the date of the incident as damages for breach of paragraph 502, since no such hire was in fact paid, is that Seadrill’s claim for unpaid hire (in so far as it relates to the period after the incident) fails for circuity of action.

Of the three grounds upon which Gazprom sought to justify its termination of the contract for Seadrill’s repudiatory breach in its letter of 16 May 2006, only one remains live. The allegation that Seadrill did not have valid insurance covering the incident and was thus in breach of paragraph 1001 appears to have been a misunderstanding and has not been pursued in these proceedings. The allegation that the carrying out of the additional works at the yard constituted a repudiatory breach was abandoned after the conclusion of the factual evidence.

Of the stated grounds in the letter of 16 May 2006, this leaves only the negligent operation of the Rig on 9 January 2006, in breach of paragraph 502 of the contract. However, in addition to that ground, Gazprom seeks both to justify its termination and claim damages for repudiatory breach by reference to the commitment of the Rig to Premier Oil. Although this was not known to Gazprom at the time, its case is that, had it been known to it at the time, there would have been a renunciation of the contract by Seadrill. Gazprom submits that the effect of the application to this case of the principle of Boston Deep Sea Fishing v Ansell (1888) 39 Ch D 339 (see Chitty on Contracts 30^th edition para. 24-14) is that Gazprom is to be treated as if it had known about the commitment to Premier Oil at the time when it terminated the contract. Accordingly, it is said that Gazprom can justify its termination of the contract on the basis of renunciation by Seadrill as at 16 May 2006, even though there was in fact no such renunciation. It seems to me there are considerable difficulties with this analysis, to which I shall return, but first I will consider the case that the breach by Seadrill of paragraph 502 of the contract was a repudiatory breach.

The specific cause of the incident was the negligence of the Master between 0200 hours and 0600 hours on 9 January 2006, in continuing to ballast notwithstanding the increasing inclination of the Rig, rather than dumping the ballast with a view to levelling the Rig. As noted above when setting out my findings of fact in relation to the incident, Gazprom no longer contends that the subsequent conduct of the Master and those on board after the legs got into a bind, in jacking up the Rig and other efforts between 9 and 11 January 2006 to salvage the situation, was negligent, even though the majority of the actual damage to the Rig was caused during those recovery operations. It follows that in terms of causation, it is common ground that it was the negligence of the Master in the early morning of 9 January which led to the incident and caused the damage to the Rig, necessitating repair at a shipyard and delaying the drilling work.

However, the criticisms which Gazprom levels against Seadrill in relation to the operation of the Rig do not stop at events in the early morning of 9 January 2006. Based upon the evidence of its Rig expert, Captain Mallett, Gazprom criticises various other aspects of the performance and contends that the mis-performance went beyond negligence, amounting to incompetence.

Because Mr Jacobs did not wish to call his own Rig expert, Mr Hoyle and did not ask to cross-examine Captain Mallett, it is correct, as Mr Rainey submits, that Captain Mallett’s evidence about the performance of Seadrill and the Master is unchallenged. In these circumstances, Mr Rainey urges me to accept Captain Mallett’s evidence and to find that there was not just negligence but incompetence on the part of Seadrill and the Master throughout the preloading operation.

I see the force of this point, but question whether it is necessary or relevant for the purposes of the issues I have to decide, either to conclude that there was incompetence rather than negligence or to make detailed findings about such incompetence in the preloading operation, before the early morning of 9 January 2006. In the context of breach of the obligation under paragraph 502 to operate the Rig with all reasonable skill and care, it is debatable what, if anything, is added to the admitted negligence on the morning of 9 January by establishing either that in continuing to ballast, the Master was incompetent, not just negligent or that prior to 0200 hours on 9 January 2006, the preloading performance was not merely negligent, but incompetent.

The question of incompetence of the Master or crew arises most frequently in charterparty and bill of lading disputes, where the presence of an incompetent crew may amount to a breach of the shipowners’ seaworthiness obligations: see for example Hong Kong Fir Shipping v Kawasaki Kisen Kaisha [1962] 2 QB 26 and may negative any reliance on crew negligence as a defence under Article IV rule 2 (a) of the Hague-Visby Rules. In its written closing submissions, Gazprom came perilously close, as I see it, to alleging that the Rig was unseaworthy by reason of the incompetence of the Master, the absence of proper training of the crew and of proper safety management systems, including a relief Master during the preloading operations. There were two fundamental problems with allegations of this kind. First, there was no seaworthiness obligation as such under the contract, nor was one alleged and second, in the main, these allegations were not pleaded, as Mr Jacobs pointed out forcefully in his oral closing submissions.

In his oral closing submissions, Mr Rainey limited himself quite rightly to the allegations which were pleaded in paragraph 71 of the Amended Defence and Counterclaim as particulars of operational negligence in breach of paragraph 502 of the contact. Those allegations can be summarised as follows:

Seadrill failed properly to plan and to carry out the preloading operation, having regard to the operations manual and good industry practice and to the recommendations of the marine warranty surveyor, Falconer Bryan;

It failed to ensure that the Rig’s centre of gravity was within the prescribed +/-0.2 metre tolerance in the operations manual or to monitor and correct the centre of gravity using the trimming tanks;

It caused or permitted the legs to be loaded unevenly during the preloading operation and caused or permitted the Rig to be out of level and at degrees of inclination in excess of the 0.3 degrees prescribed in the operations manual;

It continued with preloading operations and ballasting notwithstanding the Rig being out of level in excess of the maximum permissible inclination;

It caused or permitted crewing levels to be in place which were inadequate, leading to excessive fatigue on the part of those on board, particularly those who were meant to be monitoring and assessing preloading operations, clearly a reference primarily to the Master and to the fact that there was no relief Master.

It was then pleaded by Gazprom at paragraph 92 of the Amended Defence and Counterclaim that the conduct of Seadrill throughout the preloading operations (and particularly on 8/9 January 2006) fell so far short of acceptable standards of operation and were so contrary to ordinary industry practice as to amount to incompetence. Having considered the evidence about the preloading operation before the early morning of 9 January and in particular the evidence of Captain Mallett, there are certainly forceful criticisms that can be levelled against it, such as the fact that the Master did not follow the instructions in the operations manual and ignored the signs of a serious problem demonstated by the grinding of the wear plates to which Mr Fernandez drew his attention.

I consider that there can be little doubt that the entire preloading operation as I set it out in my findings of fact at paragraphs 49 to 61 above was conducted negligently. I also accept Captain Mallett’s expert evidence that a number of aspects of the operation exhibited incompetence on the part of the Master, specifically, (i) consistently allowing the Rig to be inclined in excess of the maximum permitted in the operations manual, (ii) failing to maintain the centre of gravity within the allowance permitted by the operations manual. However, I would baulk at going further and saying that the whole operation was incompetent.

In any event, even if the negligence before 0200 hours on 9 January 2006 was so bad as to amount to incompetence, none of that is alleged to have caused the incident and the damage to the Rig, for the simple reason that it is the continued ballasting after 0200 hours on 9 January 2006 which caused the incident. Had the Master not been negligent in the early hours of 9 January 2006, he would have dumped ballast and levelled the Rig, in which case the preloading would have continued and completed without any incident. In those circumstances, any negligence (or even incompetence) prior to 0200 hours on 9 January 2006 was wholly irrelevant in terms of causation.

Mr Rainey submitted that, nonetheless, it was important to consider the operation as a whole in judging the seriousness of the breach, whether it was, as he submitted, a gross breach, but that seems to me to be a misconception. The seriousness of the breach of paragraph 502 of the contract, in terms of whether it was repudiatory or not, is judged by the consequences of the breach. In the classic formulations of the test, the question is did the breach go to the root of the contract or did it deprive the innocent party of substantially the whole benefit of what it was intended he should obtain from the contract: see for example per Diplock LJ in The Hong Kong Fir at 70. Attaching opprobrious adjectival labels to Seadrill’s conduct in performing its obligations under paragraph 502 does not assist in determining whether its breach of those obligations was repudiatory. Putting it another way, even if the entire preloading operation had been completely incompetent, but the damage to the Rig caused by the incident could have been repaired in a week, any suggestion that the complete incompetence rendered the breach repudiatory would be unarguable.

Mr Rainey submitted that the benefit which it was intended Gazprom was to obtain under the contract consisted of six elements: (1) a rig; (2) which was competently manned and able to execute operations with reasonable skill and care; (3) which was to drill one well at a specified location; (4) a task which was to take 45 days maximum; (5) drilling of which well was to be completed by the monsoon season in May 2006, after which the rig would have to be removed from the site for design reasons and (6) drilling of which well was also to comply with the time constraints imposed by Gazprom’s licence from the DGH, which also meant drilling would have to be completed by May 2006.

Apart from the fact that, as discussed, I consider that the breach of paragraph 502 was largely due to operational negligence rather than incompetent manning, the first three elements are not controversial and derive from the terms of the contract. The second three elements are more controversial and do not appear from the terms of the contract. It is striking that, unlike in most charterparties, there is no cancelling date by which the Rig was to have been delivered into the contract service nor any obligation to proceed from wherever she was with all due despatch so as to arrive at the drilling location by a particular date.

The contract simply provided (under “Commencement Date” in Appendix A) that it was in “direct continuation to existing contractual commitment with Oriental Oil”. Mr Rainey is no doubt correct that, at the date the contract was entered into, the prognosis was that the existing contractual commitment to Oriental Oil would come to an end in October/November 2005, giving the Rig ample time to perform the contract with Gazprom before the onset of the south west monsoon. However, it was always possible that the Rig would be asked to drill further wells under the Oriental Oil contract or otherwise delayed under that contract. Even if such delay had meant that the Rig could not be delivered into Gazprom’s service until a date which might have meant it could not finish the drilling before the monsoon, that would not have been a breach of the Gazprom contract and Gazprom would still have been obliged to take the Rig under the contract. That point is really emphasised by the fact that there is nothing in the terms of the contract which requires completion of the contract by any particular date, let alone before the end of May 2006.

Gazprom seeks to counter this absence of any contractual provision providing for the service to be performed within a particular time-scale or otherwise making time of the essence, by submitting that it is enough if performance by the end of May 2006 was within the contemplation of the parties. Gazprom relies upon a passage from Treitel: Frustration and Force Majeure 2^nd edition at paragraphs 5-036, 5-037 and 5-039:

Mr Rainey submits, on the basis of that passage, that it matters not that the contract did not provide for a specific duration or for performance to be completed by the end of May 2006, because it was contemplated by both parties at the time the contract was entered that the contract duration would be about 45 days and would complete by the end of May 2006, both before the south west monsoon and within the extended licence period which would also expire in May 2006.

The effect of the breach of paragraph 502 was to delay the Rig, requiring repairs to the damage which would not be completed until some time in about June 2006, with a consequence that the Rig could not return to the drilling site until October 2006, after the monsoon, and would not complete the drilling until December 2006. In the context of a contract which it was contemplated would be completed before the end of May 2006, Mr Rainey submits that this delay was one which frustrated the “commercial adventure” and which meant that Gazprom was deprived of substantially the whole benefit which it was contemplated that it would receive under the contract. Accordingly, the breach of paragraph 502 was repudiatory and Gazprom in its letter of 16 May 2006 accepted that breach as bringing the contract to an end.

I have already held when making my findings of fact that Seadrill (and specifically Mr Van Royen) was not informed about the time restrictions on Gazprom’s licence from the DGH either at the meeting in July 2005 or otherwise before the contract was made. Of course, as a matter of commercial common sense he would have known that Gazprom were working under licence from the Indian Government and that there were likely to be time limits in any such arrangements, but that is not the same thing as being told that drilling had to be completed before the end of the extended licence period in May 2006. It is correct (as Mr Van Royen accepted in evidence) that Seadrill was aware at the time the contract was entered into that Gazprom wanted to complete drilling the well before the onset of the monsoon, but in my judgment the discussion went no further than that.

It seems to me that Gazprom (and specifically Mr Kerusov in his evidence) somewhat exaggerated the significance and difficulty of obtaining an extension and, at the time that the contract was entered into, did not in truth have any particular concern about having to drill the well before an extended licence period expired, let alone a concern which would have been shared with Mr Van Royen. In fact, the licence period was due to expire in November 2005, on any view before the contract could be performed. That did not deter Gazprom from committing itself contractually to take the Rig, no doubt because it and its partner GAIL were confident of getting whatever extension of time within reason they needed, provided that they showed that they were acting diligently rather than sitting on their hands, a confidence which was borne out by the fact that they did subsequently obtain two further extensions. Furthermore, at the time the contract was entered, the parties were at an advanced stage of negotiations for the Rig to drill a second well. Although in the event that came to nothing, the fact that it was being contemplated and would on any view have taken drilling way beyond the current licence period, suggests strongly that there were no real concerns about obtaining whatever extension was necessary, within reason.

I accept Mr Rainey’s submission that the issue of whether the breach has deprived the innocent party of substantially the whole benefit of the contract is to be judged as at the date of the breach. Accordingly, the references in Seadrill’s written closing submissions to subsequent events such as the fact that Gazprom did not purport to terminate until four months after the incident and that the substitute drilling unit, the GALAXY DRILLER, did not complete drilling until about the time when the Rig would have completed had it returned to Gazprom’s service in October 2006, after the monsoon, are irrelevant to the question which the court has to decide.

Nevertheless, I still do not consider that the delay in performance caused by the breach of paragraph 502 was a frustrating delay making the breach repudiatory. I would reach that conclusion even if (contrary to the findings I have made) Mr Van Royen had been told that Gazprom wanted to complete drilling of the first well before an extended licence period expired in May 2006. My reasons for reaching that conclusion are as follows.

First, notwithstanding the passage from Treitel upon which Mr Rainey relies, an important factor in considering whether the delay which the breach caused has deprived Gazprom of substantially the whole benefit of the contract is that the contract contained no time limits either as regards commencement, duration or completion. If it really was essential that the drilling of the well be completed before the end of May 2006, one would have expected Gazprom to seek to negotiate an express term to that effect. The fact that it did not seems to me to highlight two matters: (i) that completion before the end of May 2006 (whether before the monsoon or within an extended licensing period) was not in truth as important as Gazprom sought to make out at the trial and (ii) that by not inserting specific time limits in the contract, both parties were recognising that the uncertainty and risks involved in the offshore drilling industry are such that delays might well occur for a variety of reasons which could delay the commencement or completion of the contract, so that however desirable it might be that the contract was completed before the end of May 2006, it was always known to both parties at the time the contract was made, that it might well not be.

Second, and following on from that first reason, it seems to me that it is a complete misnomer to describe a contract which has no definite commencement date, other than that it is to continue on from an existing contractual commitment to someone else and which contains no cancelling date or specific duration, as a “commercial adventure” to complete drilling by the end of May 2006. Nothing in Jackson v Union Marine Insurance Co Ltd (1874) LR 10 CP 125 compels a contrary conclusion.

From the judgment of the majority of the Exchequer Chamber, delivered by Bramwell B, it emerges that not only was there an express provision in the contract that the vessel should proceed with all possible despatch to the load port, but the court found there was an implied condition precedent to the contract that the vessel should arrive at the load port within a reasonable time to perform the charter, non-fulfilment of which released the parties from the charter (see 144-5). There is no express obligation of due despatch here and given the uncertainties of the drilling industry to which I have referred, it seems to me there would be little scope for implying a term along the lines of that in Jackson.

Third and perhaps most importantly, it does not seem to me that, on the facts of this case, in the context of a contract where time was not of the essence, the delay which the breach entailed from January 2006 until October 2006 was such as to deprive Gazprom of substantially the whole benefit of the contract. As Professor Treitel points out in paragraph 5-039, where time is not of the essence, delay will not of itself result in a substantial or fundamental difference between the contract as it will be eventually performed because of the breach and as it would have been performed had it not been for the breach. Something more than the mere delay is required. The example Professor Treitel gives is of delay in the contract voyage exposing the cargo to serious risks of damage or deterioration. Another example is that of Touteng v Hubbard (1802) 3 B & P 291, cited in Jackson where a vessel was chartered to go from Newport to St Michael’s “in time for the fruit season” but was delayed and did not arrive until after the fruit season was over, when by definition, no fruit cargoes were available.

In my judgment, there was no additional factor here, beyond the delay itself, which meant that the breach deprived Gazprom of substantially the whole benefit of the contract. On the contrary, I consider that successful drilling of the well in the October to December period would have given Gazprom substantially the same benefit as drilling in the period January-May 2006. Even if Mr Van Royen had been told about the licence issue, that does not alter the position, given that, in any event, the existing licence would have expired before the contract could be performed and that, in truth, there was no real perceived or actual difficulty to obtaining extensions from the Indian government. The position is an a fortiori one if, as I have held, Mr Van Royen was not told about the licence issue, so that was not something in the contemplation of both parties at the time that the contract was entered into.

Thus, in conclusion on this part of the case, none of the three grounds of alleged repudiatory breach justifying termination as set out in Gazprom’s letter of 16 May 2006 was a good ground. If the termination in that letter is to be justified at all, it can only be by application of the Boston Deep Sea Fishing principle to the alleged renunciation.

The principles of law applicable in determining whether there has been a renunciation by one party to the contract entitling the other party to treat the contract as at an end are set out in the judgment of Devlin J in Universal Cargo Carriers v Citati [1957] 2 QB 401 at 436-7:

To that analysis can be added what was said in the more recent case of The Hermosa [1982] 1 Lloyd’s Rep 570 at 572-3, where Donaldson LJ, giving the judgment of the Court of Appeal, summarised the law on renunciation as follows:

The critical question is thus whether, by its words or conduct, a party has evinced an intention not to perform the contract, which a reasonable person in the position of the other, innocent, party would regard as clear and absolute? Of course, in the present case, Gazprom did not know about the commitment to Premier Oil, so that by definition there was nothing which was capable of amounting to a renunciatory breach by Seadrill. However, Gazprom contends that the court should apply the Boston Deep Sea Fishing principle and proceed as if Gazprom had been aware of the words and conduct which it alleges would have constituted renunciation. The logical starting point to determining whether that principle applies here is thus to consider whether, assuming that the words and conduct relied upon had been known to Gazprom at the time, they would have been renunciatory.

It will be apparent from the findings of fact which I made in relation to Seadrill’s dealings with Premier Oil that I am very firmly of the view that, even if all those matters had been known to Gazprom at the time, Seadrill’s conduct would not have amounted to a renunciation of the contract. It may be helpful if I summarise at this point in the judgment why I have reached that conclusion:

Although Seadrill did tell Premier Oil from 20 January 2006 onwards that it did not intend to return the Rig to India to drill for Gazprom, the contractual position under the contract dated 23 January 2006 between Premier Oil and Seadrill was always that the Rig would only become available to Premier when it had completed drilling under the Gazprom contract. Any alteration of that contractual position, under the terms of that contract would have required a formal addendum in writing, which was never drawn up, let alone signed.

Seadrill told Premier that it did not intend to go back to India, in order to assuage Premier’s concerns about delay in performance under its contract after the incident had occurred. I do not regard that as being a fixed intention but rather a reflection of the commercial reality, that after the incident Mr Van Royen and Mr Johnson thought that, in all probability, the problems with the depths to which the Rig was being required to drill, combined with Gazprom’s interest in finding an alternative drilling unit, were such that the Rig would not go back, but rather Gazprom would find an alternative drilling unit and a commercial solution between Seadrill and Gazprom terminating the contract would be reached.

As time went on, the probability of Gazprom using an alternative drilling unit only increased. By the first half of March 2006 at the very latest, Gazprom had decided that, provided that it could procure the GALAXY DRILLER to drill the two wells, it would use the GALAXY DRILLER. Gazprom only kept the contractual position with Seadrill open for the perfectly understandable commercial reason that, if any potential contract for a substitute drilling unit, be it the GALAXY DRILLER or another, fell through, at least Gazprom would have the Rig in October 2006, faute de mieux. From the time of the meeting in Bangkok on 7 March 2006 onwards, Mr Van Royen reasonably believed, in line with Gazprom’s true intentions, that unless the GALAXY DRILLER fell through, Gazprom would go with the GALAXY DRILLER rather than the Rig.

Against that background, since the overwhelming likelihood was that Gazprom would use the GALAXY DRILLER and not the Rig, that inevitably influenced the extent to which Seadrill was prepared to deal with Premier Oil, in terms of involving Premier in the upgrade works at the yard and discussing arrangements for putting an Indonesian crew on board and for loading Premier’s equipment on board. However, none of that amounted to a contractual commitment to go to Premier Oil rather than Gazprom at the conclusion of repairs. The discussions and steps being taken with Premier were none of them irreversible, in the sense that Seadrill could always have still gone back to Gazprom after the repairs if Gazprom required the Rig to do so.

To that end, Seadrill was always very careful not to make any contractual commitment to Premier Oil to go to them after the repairs rather than to Gazprom. Seadrill never gave Premier Oil the “formal commitment” which Mr Selbie was seeking in his e-mail of 9 February 2006. I see no reason to disbelieve the evidence of Mr Van Royen and Mr Johnson about that and their evidence was confirmed by Mr Selbie’s statement. Mr Johnson’s position was as stated in his e-mail in reply, to the effect that unless and until a “deal” was done with Gazprom which terminated the contract with it, Seadrill could not give Premier Oil a formal commitment.

I decline to find, as Mr Rainey urged me to, that the formal commitment was made at the meeting with Premier Oil on 1 March 2006. No doubt Seadrill was confident that the contract with Gazprom would be terminated enabling the Rig to go straight to Premier Oil, both because all the signs were that Gazprom was going to contract with Northern Offshore for the GALAXY DRILLER and, equally importantly, Gazprom had failed to pay any hire under the contract and unless and until it did, Seadrill would be entitled to serve a notice under paragraph 802 of the contract. However, unless and until the contract with Gazprom was terminated on one ground or another, I can see no earthly reason in commercial terms why Seadrill would make some formal or contractual arrangement with Premier Oil that it might not be able to keep.

Thus the formal contractual position as between Seadrill and Gazprom remained that, unless and until the contract was terminated by agreement or otherwise, the contract continued in force and the Rig would go back to the Bay of Bengal after conclusion of the repairs in June 2006. This is exactly what Mr Paul Aston told Gazprom at the meeting on 13 April 2006 attended by Mr Van Royen. I decline to find that Mr Van Royen sat by and allowed Mr Aston to say this when it was not true or did not represent Seadrill’s intention, not just because however the question put by Mr Rainey was formulated it came perilously close to putting an unpleaded case of deceit, but because, as Mr Van Royen’s answer recognised, at that stage Seadrill still had contractual obligations to Gazprom. The formal position was as stated: unless an agreement to terminate was reached or Seadrill could terminate for non-payment of hire, if “push came to shove” Seadrill would have had to return to the Bay of Bengal after repairs were completed. No doubt this would have irritated Premier Oil in commercial terms, but contractually there is nothing it could have done about it.

This analysis is not changed by the marketing circulars from Mr Johnson of 1 May and 12 May 2006 which referred to the Rig going to work for Premier Oil on the completion of repairs. I accept Mr Johnson’s evidence in relation to the latter (which would apply with equal force to the former, which was not disclosed until after Mr Johnson had given evidence) which was to the effect that this was intended to reflect the commercial reality (which was indeed that the Rig would go to Premier Oil) rather than the contractual position.

Nor is the analysis changed by the marketing information obtained by Gazprom after the evidence concluded from ODS Petrodata, an organisation responsible for publishing market information from a variety of sources. This purported to show as early as 2 February 2006 that the Rig would be delivered to Premier Oil after work in the yard. I agree with Mr Jacobs that it would be wrong to read too much into these documents. Quite apart from the fact that there is no evidence before the court as to the source or sources of the information, the information was clearly inaccurate in certain respects, referring as it did to the Rig having suffered “ a punch through while on a two well contract” whereas there never was a two well contract with Gazprom. Furthermore, the information as at 2 February 2006 does refer to Gazprom’s issue of an enquiry into rig availability to cover a replacement, evidently a reference to the letters Gazprom sent to all operators in the market in late January 2006. That suggests that the author of this article thought that Gazprom was going to terminate the contract when it found a replacement and from that it is not a long stretch to the assumption that in those circumstances, the Rig would be delivered to Premier Oil after the repair work in the yard.

Before leaving the facts concerning Premier Oil, I should deal with two further matters upon which Gazprom relied. First, Gazprom was highly critical of the evidence of Mr Van Royen and Mr Johnson in their witness statements about Premier Oil in two respects. First it was said that they both referred to Seadrill having notified Premier Oil after the termination of the contract that the Rig would be definitely coming to Premier Oil after the repair work, Mr Van Royen having said that notification was in writing. Much was made of the fact that no such letter was disclosed. Mr Johnson’s evidence in cross-examination was that whilst he did not recall whether the communication with Premier Oil after termination of the Gazprom contract was by letter, e-mail or a phone call, he was 100 per cent comfortable that there had been such a communication. I see no reason not to accept that evidence.

The second aspect of the evidence of Mr Van Royen and Mr Johnson of which Gazprom was very critical was the fact that their witness statements had not dealt with the detail of the dealings with Premier Oil, but simply asserted that the contractual position was that the Rig would not be delivered to Premier Oil until the contract with Gazprom had terminated and that whilst Premier Oil were told that the contract with Gazprom might be terminated, it was also made clear that it might not, in which case the Rig would have to complete the contract with Gazprom before it came to Premier Oil. I agree that the Premier Oil issue was dealt with somewhat summarily and shortly in their statements by both witnesses, but the essence of what they were both saying was in accordance with the true position as I have held it to be, so little if anything can be made of this criticism.

The other matter on which Gazprom relied was the alleged inadequacy of disclosure by Seadrill, in particular in relation to the position with Premier Oil. At the conclusion of the evidence Gazprom made an application for disclosure of (a) other marketing circulars from Seadrill for the period January to May 2006 and (b) copies of the weekly fax reports from Mr Van Royen to Seadrill’s head office in Oslo and any notes of meetings and conversations with Mr Troim in that head office. Although the application was resisted, I made an order for such disclosure. In the event, only one further marketing circular was produced dated 1 May 2006 and Mr Johnson provided a second statement explaining why no other such reports remained available, which Mr Rainey did not criticise.

On the other hand, no fax reports or meeting/conversation notes in the second category were disclosed. Mr Rainey was highly critical of this and of the absence of any similar explanation to that contained in Mr Johnson’s second statement. He invited me to conclude that Seadrill had failed to comply with its disclosure obligations and was seeking to hide the truth about its dealings with Premier Oil and, as a consequence, to draw adverse inferences from that failure. I do not consider that would be a proper approach for two reasons. First, as Mr Jacobs pointed out, there is no reason to conclude that Seadrill has not complied with its disclosure obligations. Further searches had been made, as I understand it, supervised by his instructing solicitors and documents in the relevant categories had not been found. I accept that explanation and have no doubt that this further search was conducted properly under the supervision of Messrs Holmans.

Second, the implication that disclosure has been deliberately withheld smacks of the conspiracy theorist approach to litigation. Experience would suggest that that is rarely the explanation; much more likely is that the documents in question have simply been lost or never existed in the first place, possibly because the relevant witness was mistaken or misunderstood. Whilst I accept that there is no specific explanation in evidence as to why these documents have not been produced, I decline to conclude that it is because Seadrill has anything to hide in relation to its dealings with Premier Oil. It is worth remembering that Mr Van Royen made no attempt to hide from Gazprom the fact that Seadrill had entered a contract with Premier Oil. The existence of that contract was specifically disclosed in Mr Van Royen’s contingency plan letter of 26 January 2006. If Gazprom had wanted to know more about that contract at the time, it could have asked, but it never did, in all probability because, even at that early stage after the incident, it was more interested in finding a replacement than in the fate of the Rig.

Even if Gazprom had known at the time in January to May 2006 everything about Seadrill’s dealings with Premier Oil, it is impossible to say that a reasonable person in the position of Gazprom would have regarded Seadrill’s words and conduct as evincing a clear and absolute intention not to perform the contract with Gazprom. Putting the matter at its very highest in favour of Gazprom, it seems to me Seadrill’s words and conduct could be regarded as equivocal, on the one hand telling Premier Oil that it did not intend to go back to the Bay of Bengal, whilst not being prepared to make a formal, contractual commitment to go to work for Premier Oil directly the works in the yard completed; on the other hand telling Gazprom, at the meeting on 13 April 2006, that the contract remained in force and the Rig would be available to Gazprom again in mid-June 2006 upon completion of the works in the yard. Such equivocal words and conduct are incapable of amounting to renunciation of the contract.

I would still have held that there was no renunciation even if (contrary to my findings) Seadrill had made a binding contractual commitment at some point in the period January to April 2006 (as Mr Rainey urged me to find) to Premier Oil to go to work for it in Indonesia after the works completed in the yard. This is because, although the effect of that commitment would have been that Seadrill had clashing contractual commitments, until the Rig came out of the yard she was not available to either Gazprom or Premier Oil. It was only when she came out of the yard in June 2006 that (assuming at that stage Gazprom had still wanted the Rig) Seadrill would have had to choose between those clashing commitments. Until then, it could not be said Seadrill had renounced the contract with Gazprom. A submission to that effect was rejected in Alfred C Toepfer International v Itex Itagrani [1993] 1 Lloyd’s Rep 360, as was a further submission that by entering a clashing contractual commitment, the defendant had put it out of its power to perform the contract and thus repudiated the contract because of impossibility of performance.

Gazprom, albeit somewhat faintly, also argued that the commitment made to Premier Oil made continued performance of the contract with Gazprom impossible. The short answer to that is that there was no inconsistent contractual commitment to Premier Oil, but even if there had been such a commitment, it seems to me that the analysis of Saville J in the Toepfer case at 362 is equally applicable to the present case:

Since there would have been no renunciation by Seadrill even if Gazprom had known all the facts concerning Seadrill’s dealings with Premier Oil at the time, the case based upon application of the principle in Boston Deep Sea Fishing fails at the first hurdle and it is not strictly necessary to consider whether that principle can ever apply to a renunciation. However, since the matter was fully argued, I will deal with the point.

Mr Jacobs advanced two reasons why the principle could not apply to a case such as the present. First he relied on the proposition that a man’s words and conduct are to be judged at the time, not by subsequent events, to support a submission that it was not open to Gazprom to trawl through disclosure by Seadrill of documents concerning its dealings with Premier Oil, years after the event, to establish something which is deemed to have been a renunciation.

Mr Jacobs relied upon the final paragraph of the quotation from the judgment in The Hermosa which I have set out above. He also relied upon the following passage from the judgment of Devlin J in Citati at 439-440:

I agree with Mr Rainey that these passages from Citati and The Hermosa are dealing with a somewhat different point, which is that, in considering whether words and conduct are clear and unequivocal for the purposes of the doctrine of renunciation, you can only look at the words and conduct at the time of the termination of the contract, and cannot seek to make what was equivocal unequivocal, by reference to subsequent events after the termination of the contract.

On the other hand, the second reason Mr Jacobs gives as to why the Boston Deep Sea Fishing principle does not apply to renunciation, seems to me to be correct. It is that the cases where the principle has been applied are all cases where, at the time of termination of the contract for a bad reason, there is, objectively speaking, albeit unknown to the innocent party at the time, a breach of contract which is repudiatory. When the innocent party finds out about that repudiatory breach, he can rely upon it as a good reason to justify the termination which would otherwise be wrongful. However, in the case of words and conduct which are said to be renunciatory, an essential ingredient of their amounting to repudiation of the contract is that they are communicated to or otherwise known to the innocent party. If they are not, then by definition there cannot be a renunciation.

None of the cases applying the principle addresses the point directly (no doubt because, as Mr Rainey accepted, there is no case in which the principle has been applied to renunciation) but that objectively there must be in existence a repudiatory breach albeit unknown at the time to the innocent party, emerges from the following summary of the Boston Deep Sea Fishing principle in the judgment of Devlin J in Citati at 443:

In my judgment, it follows that, since the words and conduct now alleged by Gazprom to have been renunciatory were not known to Gazprom at the time of the purported termination on 16 May 2006, there was not objectively speaking a repudiatory breach by reason of renunciation in existence at that date. No amount of “deemed knowledge” through the application of the Boston Deep Sea Fishing principle can remedy the complete absence of the essential ingredient of renunciation, namely communication to or at least knowledge of Gazprom at the time of what are said to have been renunciatory words or conduct.

Accordingly, there was no renunciation by Seadrill and no “good reason” beyond the reasons set out to by Gazprom in its letter of 16 May 2006 (none of which was a good reason for termination) to justify the purported termination of the contract. It follows that the purported termination by Gazprom was wrongful and a repudiation of the contract, which Seadrill was entitled to accept as bringing the contract to an end, which it did by its letter of 10 July 2006.

Even if I had considered that Seadrill was in repudiatory breach, any damages which Gazprom could recover for that breach would be no more than nominal. At the date of the purported termination on 16 May 2006, Seadrill had an accrued right to terminate under paragraph 802 of the contract. That provided as follows:

Gazprom sought to challenge Seadrill’s entitlement to terminate the contract under this provision by contending that Seadrill had agreed to forego payment until a substitute rig was provided under the contract, which it never was, alternatively had waived payment, alternatively was estopped by convention from seeking payment. It will be apparent from my detailed findings of fact above that I consider this case unsustainable. There was no agreement as alleged and nothing which could give rise to waiver or estoppel.

In those circumstances, given that on any view after the meeting of 13 April 2006, a substantial amount of hire for the period 9 December 2005 to 9 January 2006 was undisputed within the meaning of paragraph 802 and remained unpaid, Seadrill clearly had an accrued right to terminate under that provision when Gazprom purported to terminate.

It follows that any damages for Seadrill’s repudiatory breach fall to be assessed on the basis that, had Gazprom not terminated, Seadrill would have exercised its accrued right to terminate under paragraph 802, as it indeed did on 10 July 2006. In The Mihalis Angelos [1971] 1 QB 164, the Court of Appeal took into account a prospective right to terminate which had not yet accrued at the date of the claimant’s acceptance of an anticipatory breach and concluded that, because the defendant would have exercised that right to terminate, the claimant would have suffered no loss from the defendant’s repudiation and would only have been entitled to nominal damages. I agree with Mr Jacobs that the present case, where there was an accrued right to terminate is an a fortiori one. Accordingly, even if Seadrill had been in repudiatory breach as Gazprom contends, any damages recoverable would be nominal.

Since Seadrill cannot rely upon paragraph 606 of the contract for the reasons I have set out when dealing with the construction of the contract, the Second Claimant’s claim for its uninsured losses in relation to the damage to the Rig, including the hull insurance deductible, must inevitably fail because, where paragraph 606 does not apply, paragraph 901 makes it clear that Seadrill bears the risk of damage to its own property.

Seadrill also claims the costs of slow steaming and towage of the Rig to Singapore and insurance of the tow to Singapore. In so far as those costs are claimed under paragraph 606, the claim fails for the same reason as the claim for other uninsured losses. However, the claim is also put on the basis of paragraph 708 (c) which provides:

if in the event the Drilling Unit is taken into sheltered waters or harbour for inspection, repair, maintenance, or structural defects, the related rig move costs and harbour expenses will be for Operator’s account;”

On the face of it, it seems to me that the towage and insurance costs would be recoverable under this paragraph. However, I agree with Gazprom that, since these expenses were only incurred as a consequence of Seadrill’s breach of paragraph 502, Gazprom would be entitled to counterclaim damages in respect of any liability to pay those items. Accordingly Seadrill’s claim in respect of those items fails for circuity of action.

Furthermore, as I have also already determined, any claim by Seadrill for hire after 0600 hours on 9 January 2006 also fails for circuity of action. On the other hand, as I have also held, there was no agreement by Seadrill (whether at the meeting in Bangkok on 7 March 2006 or otherwise) to forego the hire which was due to it and no waiver of the entitlement to hire or anything which would estop Seadrill from making such a claim for hire. It follows that Seadrill is entitled to recover hire at whatever is the appropriate rate from the commencement of the contract until the incident at 0600 hours on 9 January 2006.

There are a number of issues which still need to be resolved in relation to the amount and rate of hire recoverable during that period. The first concerns the period of time until arrival at the drilling location during which the Standby Rate of hire was payable. The provisions of the contract which are relevant to this dispute are as follows:

As set out above in my findings of fact, the Rig arrived at Dubai (which was the place of mobilisation under the contract) on 23 November 2005. However, it was not loaded onto the carrying vessel ASIAN ATLAS until 9 December 2005. Gazprom contends that no hire is payable until 9 December 2005, because it was only then that the Rig commenced jacking operations preparatory to moving it to the drilling location.

Seadrill’s case is that hire is payable at the Standby Rate from 23 November 2005, either when the legs were jacked down at Dubai (which it contends was the relevant jacking operation within the meaning of the definition of “Commencement Date” in paragraph 101 (a)) or at 1800 hours when the Rig tendered notice of readiness and was placed at the disposal of Gazprom, on the basis that Appendix A states that “Commencement Date” is in direct continuation to the existing contractual commitment to Oriental Oil.

It seems to me that both these ways of putting the case have difficulties as a matter of construction. As to the first, it is a complete distortion of language to describe the jacking down at Dubai as commencement of jacking operations preparatory to moving the Rig to the drilling location. The operation was preparatory to waiting at Dubai and the jacking operation preparatory to moving did not commence until 9 December 2005. As to the second, as paragraph 103 makes clear, the provisions in the body of the contract (including paragraph 101 (a)), are to prevail over any of the Appendices. Accordingly, the words “Direct Continuation to existing contractual commitment to Oriental Oil” cannot be used to redefine when the Commencement Date is, for the purpose of the running of hire. Rather, their purpose is merely to make it clear that the Rig will not be delivered into Gazprom’s service, until it has finished its existing commitment and the one contract will follow on from the other. The words tell one nothing about when hire commences.

Seadrill’s alternative case is that since the Rig was placed at Gazprom’s disposal at 1800 hours on 23 November 2005 and Gazprom’s carrying vessel did not start loading the Rig until 9 December 2005, notwithstanding that Gazprom had had ample notice as to when the Rig was expected to arrive at Dubai, this was a “period of delay when Contractor is unable to proceed …as a direct result of an act …or omission of Operator including …the failure of Operator to provide services” within the meaning of paragraph 705(a).

As a matter of construction, that contention seems to me to be correct and the suggestion made by Gazprom that paragraph 705(a) does not apply until the hire has already commenced under paragraph 705(b) is not supportable as a matter of language. Gazprom relied upon two other matters. First it contended that any delay was caused by Seadrill’s failure to give notice as to when the Rig would be provided. That argument is unsustainable on the facts since Gazprom had ample notice as far in advance as 26 September 2005, that the Rig would be arriving at Dubai in mid November 2005 and thus ample opportunity to get its carrying vessel in place to load the Rig without delay.

The second matter is that the Rig is said to have been out of Class and without insurance between 23 November and 9 December 2005 and, accordingly, could not be used by Gazprom during that period. Gazprom relied upon a passage in Mr Kerusov’s witness statement to that effect. Whilst it is correct that he was not challenged in cross-examination on this passage, the court has to look at the evidence as a whole. Since the ASIAN ATLAS did not arrive off Dubai until 6 January 2005, it is simply not correct that any lack of certification delayed the loading of the Rig onto the carrying vessel, prior to the arrival of that vessel.

Furthermore, a passage from the statement of Mr Bandurchenko, which was also relied on by Gazprom, states that this “lack of certification did cause a delay to the movement of the [Rig] from Port Rashid to the Asian Atlas”. This suggests that the delay he is referring to was delay after the arrival of the ASIAN ATLAS on 6 December 2005, although he does not specify what that period of delay was.

It seems to me that in principle, the correct approach is that the bulk of the delay between 23 November and 9 December 2005 was caused by the delay in arrival of the carrying vessel, for which Gazprom bears responsibility. Accordingly, hire runs from 1800 hours on 23 November 2005 at the Standby Rate pursuant to paragraph 705(a). From that falls to be deducted hire for a short period of delay at some stage between 6 and 9 December 2005, because of absence of Class certification. What that period was exactly cannot be discerned from the materials to which my attention has been drawn, although I suspect it will have been less than 24 hours. If the parties cannot agree the period, I will give permission to present further submissions and evidence on the point hereafter.

A more minor dispute has also arisen as to commencement of the Operating Rate. Under paragraph 704, this is first payable when the Rig arrived “at the first drilling location and commences…jacking operations”. Seadrill contends that this was at 0000 hours on 2 January 2005 when the Rig began jacking down its legs after float-off from the ASIAN ATLAS. Gazprom’s short answer to this, which it seems to me must be right as a matter of construction, is that at that stage, the Rig still had to be towed to the first drilling location, where it did not arrive until some hours later at 13.30 hours. Jacking operations at the first drilling location did not commence until 14.45 hours on 2 January 2005 and it was then that the Operating Rate commenced.

It is accepted by Gazprom that Seadrill is entitled to recover the mobilisation payment of US$97,000 pursuant to paragraph 702 of the contract. Gazprom resisted having to pay the same sum by way of demobilisation payment. In circumstances where, as I have held, Gazprom’s purported termination of the contract was wrongful, it seems to me that Seadrill is entitled to the demobilisation payment as well.

Gazprom’s counterclaim includes various heads of damage said to arise as a consequence of Seadrill’s breach of paragraph 502, irrespective of whether or not that breach was repudiatory. Since I have held that the breach was not repudiatory, Gazprom can only recover those damages caused by the non-repudiatory breach. For the purposes of this judgment, I am not concerned with the detail of the items claimed, but only the issues of principle on quantum of damages which have been raised.

One of the principal heads of claim for breach of paragraph 502 is wasted costs and expenses said to have been incurred in relation to the Rig. At its furthest reach, this claim includes all the costs and expenses incurred in respect of the Rig, on the basis that those costs and expenses were all wasted because, in order to complete the first well, Gazprom was going to have to start all over again, whether with this Rig or another one. Mr Jacobs contended that pre-breach costs would only be recoverable if Gazprom could establish that the breach was repudiatory and that it was entitled to terminate (which for the reasons I have given, it cannot). That was because, if the contract remained alive for future performance (which it is to be assumed it did in assessing damages for non-repudiatory breach) there was no question of total failure of consideration and Gazprom cannot demonstrate that all the pre-breach expenses have been entirely wasted.

However, it does not seem to me that there is any bar in principle to the recovery of pre-breach costs in a case of non-repudiatory breach, to the extent that Gazprom can demonstrate that those costs have been wasted as a consequence of the breach of contract: see Chitty on Contracts 30^th edition para 26-072. It seems to me that if, at the end of the day, the overall costs of drilling the first well exceeded the costs which Gazprom would have incurred in drilling that well had it not been for the breach, those wasted costs should in principle be recoverable as damages, subject to the various points below.

Amongst the “wasted costs” claimed by Gazprom are the costs of demobilising the Rig and the costs of “remobilisation” albeit of the GALAXY DRILLER not the Rig. The costs of demobilising the Rig do seem to me to be wasted costs and in principle they should be recoverable as damages, at least to the extent that they do not represent costs which would have been incurred anyway if the contract had been performed. On the other hand, the costs of “remobilisation” seem to me to be more problematic.

Seadrill accepts that if the Rig had gone back to drill the first well, Gazprom could in principle have recovered as damages additional expenses incurred in remobilising the Rig to get it back to the same position it was in before the breach. However, that is not what happened, because Gazprom wrongfully terminated the contract and the expenses it in fact incurred in “remobilisation” related to an entirely different drilling unit, the GALAXY DRILLER.

Seadrill denies any liability for those costs on two grounds. First it contends that those damages were not caused by any non-repudiatory breach of paragraph 502, but by Gazprom’s decision not to take the Rig back and to hire the GALAXY DRILLER instead and Gazprom cannot recover the costs of mobilising a completely different drilling unit. Gazprom’s answer to this is that it should make no difference to the recoverability of the remobilisation costs in principle, that it was a different unit which was “remobilised”. Obviously if Gazprom incurred more costs remobilising the GALAXY DRILLER than it would have done if it had been remobilising the Rig, those additional costs would not be recoverable, but the core costs which would have been incurred in “remobilising” any drilling unit should be recoverable.

I can see considerable force in Gazprom’s argument, subject to Seadrill’s second objection, which is much more formidable. This is that the costs of mobilising the GALAXY DRILLER to the first drilling location should not be recoverable because those mobilisation costs would always have been incurred in order to use the GALAXY DRILLER to drill the second well. Seadrill was never under any contractual obligation to drill the second well, and damages are to be assessed on the basis that the defendant is only liable for breach in fulfilling his minimum obligation under the contract. It follows that Gazprom was always going to incur the costs of mobilising another drilling unit, in the event the GALAXY DRILLER, to drill the second well.

In my judgment this point is unanswerable, both on the facts and as a matter of analysis. Accordingly, the “remobilisation” costs incurred in relation to the GALAXY DRILLER are not recoverable as damages for breach of paragraph 502, save to the extent that Gazprom can demonstrate that additional costs were incurred in “remobilising” the GALAXY DRILLER to the first well, which would not have been incurred in any event in due course in mobilising it to the second well. Thus it seems to me that costs which Gazprom would have incurred anyway on the basis that the Rig had performed the contract and drilled the first well, but then the GALAXY DRILLER or some other drilling unit had drilled the second well, are not recoverable as damages.

Furthermore, to the extent that the cause of costs being wasted was Gazprom’s own repudiatory conduct in terminating the contract and not taking the Rig back after the monsoon, those costs would not be recoverable as damages for breach of contract: see per Mustill J in The Hermosa [1980] 1 Lloyd’s Rep 638 at 652 lhc. Consideration of the extent to which costs were wasted as a consequence of Seadrill’s breach of contract, as opposed to as a consequence of other causes, such as Gazprom’s own repudiatory conduct, is left over to the subsequent trial of detailed issues of quantum.

The Counterclaim as pleaded also claims as damages any hire otherwise payable after the incident. Since Gazprom never paid any of that hire and I have already held that Seadrill’s claim for the hire after the incident fails for circuity of action, it is not necessary to consider this head of damages further.

Since I have held that (i) there was no repudiatory breach by Seadrill and (ii) even if there had been, at 16 May 2006 when Gazprom purported to terminate, Seadrill had an accrued right to terminate under paragraph 802, so that any damages would be purely nominal, it is unnecessary to consider the counterclaim for damages for repudiatory breach in any detail. I propose simply to deal with the broad issues of principle raised by Gazprom’s claim for damages for repudiatory breach.

Obviously, to the extent that Gazprom seeks to claim the costs of the GALAXY DRILLER as such damages, that claim is open to the fundamental objection which I have referred to in the last sub-section of the judgment, that those costs were always going to be incurred anyway in hiring a second drilling unit to drill the second well, irrespective of any breach of contract by Seadrill, repudiatory or otherwise.

That is not the only objection to the claim for the costs of the GALAXY DRILLER. The premise upon which Gazprom seeks to claim damages for repudiatory breach as set out in its Counterclaim is that, in reasonable mitigation of a liability it would otherwise have had to GAIL and/or the Indian government, Gazprom incurred the expense of hiring the GALAXY DRILLER. However, as Seadrill points out, if Gazprom had incurred a liability to GAIL and/or the Indian government, it could not have recovered damages from Seadrill in respect of that liability.

Seadrill put forward two reasons why such damages would not have been recoverable. First, that they would be too remote. Consequential damages of that kind could only be recoverable under the second limb of Hadley v Baxendale (1854) 9 Exch 341. Since, as I have held, Mr Van Royen was not aware before the contract was entered of any of the specific time frames under the PSC and the contract itself contained no time limit, no question arose of Seadrill having knowledge of special circumstances.

Second, Seadrill relied upon the exclusion clause at paragraph 909 of the contract:

In its closing submissions, Seadrill accepted that, on the present state of the authorities (the effect of which are usefully summarised in paragraph 83 of the judgment of Teare J in Ferryways NV v Associated British Ports [2008] 1 Lloyd’s Rep 639 at 649-650), the exclusion of “special, indirect, or consequential damages resulting from or arising out of this Contract, including, without limitation, loss of profits, or business interruptions” in this provision only excludes damages falling within the second limb of Hadley v Baxendale. Seadrill reserved its right to argue to the contrary in a higher court. However, even on this narrow construction of the provision, since any damages in respect of liability incurred to GAIL or the Indian government would only be recoverable because of knowledge by Seadrill of special circumstances, any liability for such damages was excluded by paragraph 909.

In my judgment, damages for any liability to GAIL or the Indian government would not be recoverable for both the reasons put forward by Seadrill. It necessarily follows that Gazprom cannot recover as damages the cost of mitigating a potential liability which if it were incurred would not itself be recoverable. For the same reasons, Gazprom is not entitled to the declaration it seeks for an indemnity against that potential liability to GAIL and/or the Indian government.

However, this is all academic since, on my findings there was no repudiatory breach by Seadrill and, even if there had been, damages would be merely nominal.

My overall conclusion in relation to Seadrill’s claim is that (i) the claim for hire succeeds for the period from 1800 hours on 23 November 2005 to 0600 hours on 9 January 2006, with the various refinements set out in detail above (ii) the claim for uninsured repair costs and expenditure arising out of the incident fails because paragraph 606 is not applicable; (iii) the claims for hire after 0600 hours on 9 January 2006 and for towage and insurance of the tow to Singapore fail for circuity of action.

In relation to Gazprom’s counterclaims (i) there was no repudiatory breach by Seadrill which entitled Gazprom to terminate the contract; (ii) even if there had been a repudiatory breach by Seadrill, any damages recoverable as a consequence of that repudiation would be merely nominal and (iii) Gazprom is entitled to recover as damages for non-repudiatory breach of paragraph 502 wasted costs and expenses in relation to the Rig to the extent that they were truly wasted as a consequence of Seadrill’s breach but (iv) is not entitled to recover any costs and expenses in relation to the GALAXY DRILLER to the extent that those costs and expenses would have been incurred anyway in relation to the drilling of the second well.