BMT Marine and Offshore Survey Ltd v Lloyd Werft Bremerhaven GmbH

This action concerns a fire which occurred on 8 August 2006 at a shipyard belonging to the Part 20 Defendant, Lloyd Werft Bremerhaven GmbH (‘LWB’). It occurred while repairs and conversion works were being carried out to the m/v ‘CALA PALMA’ which was owned by the Third Claimants (the ‘Owners’). The works were being carried out under a contract (the ‘Conversion Contract’) made between the Owners and LWB, dated 20 January 2006, which provided for German law to govern the contract and for the exclusive jurisdiction of the Courts of Hamburg.

At the time of the fire the vessel was insured by the First and Second Claimants (the ‘Insurers’) under a Policy which was governed by Italian law, and under which the Owners and LWB were named as co-assured. The Policy incorporated the Institute Time Clauses - Hulls - Port Risks (20.07.87) as amended, and clauses 5, 8 and 9 of Institute Clauses for Builders Risks (1.6.88). In addition the Policy required, as a condition precedent to liability, that a shipyard and/or project risk assessment JH2003/143 survey be carried out by the Defendant and Part 20 Claimant (‘BMT’).

For present purposes it is to be assumed that the fire occurred as a consequence of hot works being carried out by one of LWB’s sub-contractors; and that as a result the Vessel suffered significant damage.

In the main action, the Insurers claim as assignees of the Owners and seek to recover their loss from BMT on the grounds that BMT failed to exercise reasonable skill and care in the performance of the JH143 survey, in particular in relation to its review of hot works procedures adopted by LWB and its sub-contractors. In its Defence BMT denies any want of reasonable skill and care and contends that the cause of the fire was the negligence and/or breach of contract by LWB (or its sub-contractors) in carrying out the hot works.

BMT has brought the present Part 20 proceedings against LWB claiming a contribution or indemnity for any liability that it is found to have to the Claimants, on the grounds that the fire was caused by the fault of LWB or those for whom it was responsible. This claim was originally pursued under the Civil Liability (Contribution) Act 1978 (‘the 1978 Act’). By its Defence to the Part 20 Claim LWB contended among other defences that, as a matter of German law and on the proper construction of the Conversion Contract, Owners had agreed to waive or surrender any right to claim against LWB whether in contract or in tort in respect of work done to the Vessel; and that consequently LWB had no liability to the Claimants and therefore BMT could have no claim against LWB under the 1978 Act.

BMT amended its Part 20 Claim to claim in the alternative that it was entitled to a contribution or indemnity from LWB for any liability that it was found to have to the Claimants as a matter of German law, in particular under §§420-426 of the German Civil Code. By its amended Part 20 Defence LWB denied that German law was the appropriate law to determine questions of contribution between itself and BMT, and denied that any right of contribution arose against it under German law in any event.

The terms of the Conversion Contract which are relevant to the Part 20 Claim are contained in Article XI. This provided, so far as material,

By an Order made on 23 November 2010 various Preliminary Issues were directed to be heard by Gloster J.

Issues (a), ( b) and (d) raise issues of German Law. Issue (c) raises an issue of English Law to be answered in the light of the findings at (a) and (b).

So far as it is material, the background to the negotiation is relatively uncontroversial.

Article XI of the Conversion Contract went through a processs of negotiation which involved Mr Werner Lüken (the Managing Director of LWB) and Dr Julius Drumm (Rechtanswalt and Partner in the firm of Dr. Schackow & Partners) on behalf of LWB, and Dr Paolo Terrile (a lawyer with Munari, Maniglio Panfili) and lawyers instructed by the Owners’ Insurance Brokers (Cambiaso Risso) on behalf of the Owners. Mr Lüken, Dr Drumm and Dr Terrile gave evidence at the trial of the preliminary issues; and it will be necessary to consider their evidence of the negotiations which (it is common ground) is admissible and relevant under German law in order to construe the relevant terms of Article XI.

The first draft of the Conversion Contract, dated 16 November 2005was prepared by Dr Drumm on behalf of LWB, and contained an important protection for the Yard: an exclusion of liability except in the case of gross negligence (Article XI.8), with the Owners procuring insurance against the risks of damage by LWB (article XI.1), with LWB being named as co-insured in the policy (Article XI.2).

Various drafts were exchanged and amended by the lawyers acting on each side; and on 11 January 2006 there was a meeting in Groningen in the Netherlands, between the Owners and LWB, at which the Owners wanted the deletion of Article XI.1 and 2.

LWB were prepared to agree to the deletion of these parts of Article XI provided Owners maintained their normal hull and machinery cover for the vessel and agreed to procure Builders’ Risk Insurance for LWB up to a value of €50 million. Dr Drumm prepared a draft reflecting this proposal (the seventh draft) dated 13 January 2006.

On 19 January Dr Drumm was sent a further (ninth) draft of the Conversion Contract dated 18 January 2006 which had been prepared by Mr Finzi of the Owners. This was a variation of Owners’ first and later drafts by which LWB would be co-assured by the Owners under the terms of the Institute Time Clauses Hull - Port Risks, supplemented by the Institute Clauses for Builders’ Risks, with LWB not being liable for any loss or damage unless the loss or damage was attributable to events which LWB could reasonably foresee and avoid. The word ‘not’ was omitted but understood.

This was the draft which the parties had before them when they met at Genoa on 20 January 2006; and formed the basis of their final discussion and negotiation.

At the conclusion of that meeting Article XI was scored through with diagonal strokes of a pen and Article XI.7 was amended in manuscript.

The final draft was tidied up and was agreed in the terms set out in [7] above.

Following a survey carried out by BMT between 24 May and 18 July 2006, and a written Advice dated 21 July, the Insurers issued the Policy on 19 July 2006, naming the Owners and LWB as insured for their respective interests. The Vessel had arrived at the Yard on 10 July; and on 8 August the fire broke out on board the Vessel while welding work was being carried out in cargo hold no.1. The fire was not extinguished until 10 August 2006 and caused extensive damage.

For BMT, Mr Cooper QC submitted that the Owners neither waived nor agreed to surrender any right to bring a claim against LWB in respect of the work to be carried out on the Vessel under the Conversion Contract. On the proper construction of the Conversion Contract the Owners and LWB agreed that the Owners would take out insurance cover for the Vessel which would include cover in the event of loss or damage caused by the negligence of LWB (save in the circumstances identified in Article XI.7 of the Contract). However, this agreement as to the way in which the losses arising from any damage caused by LWB’s negligence would be met did not release LWB from its underlying liability for any negligence on its own part or that of its sub-contractors. The effect of Article XI was that LWB retained a liability to Owners for loss or damage to the Vessel caused by its negligence, with the liability being met initially by the insurance cover taken out by the Owners. By offering cover for the Vessel for the purposes of Article XI of the Contract the Insurers waived any right of recourse against LWB for the consequences of LWB’s negligence. However, this waiver of the right of recourse did not extinguish LWB’s liability for negligence.

For LWB, Mr Rainey QC submitted that Article XI of the Conversion Contract expressed the intention of the parties that LWB should be under no liability for damage caused by LWB during the course of the works. Any loss caused to Owners in such a way was to be covered by insurance covering any potential damage to the Vessel caused during the conversion which was caused by LWB or those for whom it was responsible. It was only if the Insurance did not cover the loss due to some fault of LWB’s management that LWB should be liable.

I had the advantage of hearing from two German Lawyers. Dr Jan Dreyer of Dabelstein & Passehl gave evidence on behalf of BMT and Dr Klaus Kostka of Taylor Wessing gave evidence on behalf of LWB. Both were clear, authoritative and measured in their evidence; and there was a large amount of agreement between them as to the approach which the German Courts would take to the construction of the Conversion Contract.

The guiding provisions are sections 133 and 157 of the German Civil Code which governs Willenserklärungen (declarations of intent) including contracts. Section 133 provides,

The first stage is a process of determining whether there is evidence to demonstrate a common intention of the parties as to the meaning of the contractual provisions.

This first step has been described by the Bundesgerichtshof, the Federal Supreme Court of Germany, in a judgment of 26 October 1983, published in the periodical Neue Juristische Wochenschrift 1984, p.337 ff, cited by Dr Dreyer.

It is only if no such common intention can be found, that the Court will adopt a second stage analysis which involves construing the contractual provisions objectively. At this second stage it is necessary to consider all relevant circumstances including the wording of the contract and its purpose, the pre-contractual negotiations of the parties and the parties’ commercial interests. It was also common ground that liability exemption clauses are to be construed narrowly contra proferentem.

A two-stage approach in which the Court initially seeks to identify the subjective intent and, failing which, then applies an objective test which includes close consideration of negotiations, is plainly different to the approach of the English Court in which the intent of the parties is determined by the words used and (in most cases) consideration of the negotiations is excluded.

LWB called three of those who were involved in the final stage of the negotiations at Genoa on 20 January 2006: Dr Drumm and Mr Lüken (who had represented LWB) and Dr Terrile (who had represented the Owners). There was one other person involved in the negotiations (Mr Finzi) who was not called.

Dr Drumm and Dr Terrile gave similar evidence: that the final agreement involved a concession on each side. Owners were successful in negotiating a concession from LWB in relation to Article IX, the payment of liquidated damages for delay. LWB was successful in negotiating a concession from Owners in relation to Article XI. Dr Drumm’s evidence was that LWB always tried to negotiate a clause by which it avoided liability by agreeing that the Owners should insure their own and LWB’s interests, and very seldom succeeded. As he put it in evidence,

Dr Drumm and Dr Terrile agreed that what was intended and agreed was that LWB would be under no liability in respect of negligence unless the insurance cover was withdrawn due to the gross negligence of LWB’s management; and that LWB would be named as co-assured on the Owners’ Hull and Machinery Policy and be covered in respect of Builders’ Risks. This was illustrated starkly in the cross-examination of Dr Terrile

The evidence from Dr Drumm and Dr Terrile was clear: the parties had not agreed that LWB was to remain liable, with liability being met in the first instance by a claim against Insurers. The point was put to and answered by Dr Terrile in cross-examination.

The evidence from the two lawyers who negotiated the Conversion Contract was emphatic. There was no agreement that LWB would retain an underlying liability to Owners for negligence which was to be met by insurance cover. As LWB had made clear during the negotiations, if it were to be made liable for negligence, it would have required separate liability cover for which Owners would have been charged by way of increase to the Contract price.

Faced with this evidence Mr Cooper made three points. First, the Court should be cautious about accepting the evidence of participants to a negotiation who gave evidence of what had occurred 5 years before. Secondly, the word ‘remains’ in Article XI.7 is inconsistent with this evidence. Thirdly, one of the answers given in evidence by Mr Lüken threw a starkly different light onto the position of LWB.

Mr Cooper is right to remind the Court of the dangers that the parties might reconstruct a common intent 5 years after the event, where the position may have been very much less clear at the time. However, the evidence from the lawyers on each side was plain. Mr Cooper did not suggest any ulterior reason why Dr Terrile should give the evidence he gave; and although Dr Drumm’s evidence clearly assisted his client, he gave a credible reason for remembering the negotiations, as being one of the few occasions when a customer of the Yard had agreed to this type of clause.

The phrase ‘LWB remains liable’ might have undermined the evidence of the common intent were it not for the evidence that it was not intended to mean that LWB had a residual liability in the sense advanced by BMT. Dr Drumm explained his intention,

While such evidence would not usually be admitted as a matter of English law, it is admissible under German law to explain a common intent which may not have been reflected in the words of the contract. The evidence is also consistent with the evidence of Dr Terrile who in evidence used the word ‘remains’ and the word ‘is’ interchangeably in this context. I regard the use of the word ‘remains’ to be consistent with a common understanding that there was a residual liability if the Builders’ Risk cover was withdrawn due to a fault of LWB’s management.

At the conclusion of his cross-examination Mr Lüken was asked,

It seems to me that this answer should be treated with caution. While I accept that an unguarded concession in cross-examination may be more reliable than any number of well-crafted paragraphs in a witness statement, Mr Lüken’s evidence showed that his grasp of the English language and of the legal issues involved in the negotiation of Article XI was imperfect. There were earlier answers which were inconsistent with the answer BMT rely on and it is clear that he had left Dr Drumm to negotiate the detailed legal points on BMT’s behalf. In these circumstances I attach very much less weight to this evidence than otherwise I might.

Although I have found the evidence of Dr Drumm and Dr Terrile cogent and persuasive, before reaching a concluded view of the matter, it may be useful to consider the material which is relevant at the second stage, the Objective Construction. If consideration of this evidence were to cast significant doubt on the evidence of the common intention, then this may be a matter properly to be weighed when assessing the evidence of common intent. This is not to apply any principle of German Law, but rather as part of the English Court’s process of assessing evidence.

At this stage of the analysis the extent of admissible material is broadened, and the language of the contract, its purpose, evidence of the negotiations and the interests of the parties all become admissible.

So far as the interests of the parties is concerned the Court’s function is to reconcile the interests of both parties as much as possible and, in the case of doubt, to find a reasonable agreement which corresponds with the interest of both parties and comes to the result intended by them.

It is convenient to start with the language, context and purpose of Article XI.7, without losing sight of the fact that Articles XI.1, 2 and 7 are linked.

As already indicated Article XI.7 (and in an earlier form, Article XI.8) went through a process of negotiation, which included the deletion at the meeting on 20 January of Owner’s draft Article XI.7, which had provided for the circumstances in which LWB was to be liable for loss and damage. There is force in Mr Rainey’s submission that BMT’s construction gives effect to a provision which was expressly deleted; and there is also merit in his further submission that it is difficult to see why LWB was ‘to remain liable’ if cover were withdrawn under Art XI.2, if that sub-clause already had the effect that it was liable.

However, there was in my view a more compelling argument deployed by Mr Rainey. It was clear from the evidence given on behalf of LWB that if it accepted liability for negligence under the contract it procured liability insurance and charged the premium to the contract. LWB did not procure liability insurance (in contradistinction to Hull cover), yet on BMT’s case, LWB did not exclude liability for negligence under the German Civil Code and Owners avoided paying the cost of the extra €72,500 premium that such protection would have cost LWB. On the face of it this is a strange commercial result which the parties are unlikely to have intended.

Article X1.2 contains the obligation to take out insurance with Owners and LWB as co-insured. The experts agreed that until 2000 there had been a line of cases in the Federal Supreme Court which had decided that contracts which provided for co-insurance were generally regarded as including a waiver of liability between the co-assured in relation to the liability covered by the insurance. There was an issue between the German experts as to the significance of various decisions after 2000 and the extent to which these decisions affected the law as it would apply to the present contract.

Dr Dreyer’s view was that the previous law had been changed by the Judgment of the Federal Supreme Court of 8 November 2000 - IV ZR 298/99, Bamberg and in a number of decisions which followed what the parties referred to as this ‘landmark case’. In his view the law was correctly summarised in an extract from Palandt-Grüneber, the leading commentary on the German Civil Code,

Dr Dreyer expressed the point in §4.7 of his report as follows,

Dr Kostka disagreed with this view; and Mr Rainey criticised Dr Dreyer’s analysis (which in his oral evidence was expressed less tentatively than in his report) on 7 grounds. First, the cases were all concerned with a different level of contract. In the landmark decision the landlord made an ancillary charge for insurance under the tenancy agreement. The tenant had caused an accident which had led to damage to the property and the insurer having paid out the claim to the landlord, then sued the tenant. The Court treated the insurer as barred from suing the tenant on the basis that it was effectively a term of the insurance policy that the insurer would not be able to sue the tenant on whose behalf the insurance was taken out. Importantly the decision was concerned with the effect of the insurance contract and not the underlying tenancy agreement. In the context of the present case, the Court was construing the Insurance Policy and not the Conversion Contract. Secondly, the basis of the landmark decision was a clearly expressed policy consideration: the protection of the tenant against recourse by the insurer where the tenant had effectively contributed to the premium. Thirdly, none of the cases were concerned with an express co-assurance clause such as Article XI.2. Fourthly, and linked to the first point, none of the cases concern an implied co-assurance in the underlying contract (the tenancy agreement): the relevant term was implied in the insurance contract (in the present case the Italian law Hull Policy). Fifthly, the cases were not concerned with the interpretation of a ship repair contract subject to German law, where special consideration may apply. Sixthly, three out of the five cases following the Landmark case were particularly remote from the facts of the present case, since two of them concerned the German law of double insurance and the third concerned an express agreement that liability insurance would be taken out on behalf of another party.

Applying the principles of interpretation established by German Law (including the presumption in respect of exemption clauses, I have concluded that Article X1.7, whether viewed alone or with Article XI.2, is to be construed as providing for an exclusion of liability for negligence save where the Builder’s Risk insurance does not provide cover due to the fault of LWB’s management. In my view the Landmark case and the cases which followed provide little assistance in the interpretation of Article XI, for the reasons articulated by Mr Rainey and which I accept: not least because Dr Dreyer’s argument necessarily involves extending a principle established in one area of the law (Landlord and Tenant) to another field (the construction of a ship-building contract) and to a ‘different level’ of contract to that to which the German Courts have applied it.

The conclusion that I have reached on the basis of the objective interpretation confirms, and in any event does not undermine, the view I have formed on the basis of the subjective interpretation.

It follows that I answer the questions posed by issue (a) yes, and issue (b) no.

It is agreed that if Article XI is to be construed as exempting LWB from any liability to the Owners in respect of its negligence except in the circumstances set out in Article XI.7, BMT have no claim for a contribution or indemnity against LWB under the 1978 Act. A consideration of this issue therefore proceeds on the hypothesis that I am wrong on Issues (a) and (b).

It is convenient to start with the relevant statutory provisions.

It follows from the terms of ss.1(1) and s.6(1) that in order to recover a contribution from LWB, BMT would have to show that LWB and BMT were persons liable in respect of the same damage suffered by the Owners. In other words, BMT would have to show the Owners are entitled to compensation in respect of damage done to the vessel against both BMT and LWB. As Lord Hope expressed it in Brompton Hospital NHS Trust v. Hammond (No.3)[2002] 1 WLR 1397 (HL) at [46]

There was argument between the parties as to whether the provisions of the 1978 Act were to be read broadly so as to give effect to their presumed legislative purpose or whether they should be read narrowly according to their express provisions. Both Counsel referred to the speeches in the Royal Brompton case (see above) to support their arguments: Mr Cooper’s that the Act should be given a wide construction and Mr Rainey’s that it should not. It seems to me clear that, although Lord Bingham at [5], Lord Steyn at [26] and Lord Hope at [45] recognised that the 1978 Act extended the reach of the contribution principle to a wider range of cases, a purposive and enlarged view of the reach of the statute did not assist where the words ‘liable in respect of the same damage’ were clear, see Lord Bingham at [6], Lord Steyn at [27] and Lord Hope at [47]. The key to a claim under the Act is an entitlement to recover compensation from a party in respect of the same damage and the question here is, whether Owners have an entitlement to recover compensation from LWB in respect of the damage to the vessel?

On the hypothesis that BMT were correct on issues (a) and (b), Mr Rainey submitted that BMT’s expert had acknowledged that Owners had no right to recover compensation from LWB in respect of the fire damage, because they had agreed to recover from the Insurers. He relied on passages in the transcript of the cross-examination of Dr Dreyer, where he had acknowledged this and to Dr Dreyer’s comment in §62 of the Joint Memorandum.

The relevant principle is described in the Judgment of the Federal Supreme Court of 13 November 2004 – VIII ZR 28/04 Saarbrücken as ‘dolo agit, qui petit, quod statim redditurus est’ (He acts in bad faith who takes what he must hand back). It is agreed between the parties that it was a term of the Policy that the Insurers could not sue the co-assured.

Mr Cooper drew attention to the qualification in parenthesis in §62 of the Joint Memorandum; but this does not help BMT since the issue at this stage is not whether a claim might be advanced, but whether the Owners were entitled to recover compensation from LWB in respect of the damage. It is clear that from the moment the fire occurred, they were not; and this was because they had contractually agreed to look to their Insurers to cover their losses.

Mr Cooper further argued that the Owners had a contingent claim for compensation, if the insurance failed; but that does not assist BMT since the Act is not concerned with a contingent claim and it would be necessary to show that the contingency had occurred. In the present case, of course, the Insurers have paid the claim to the Owners and are bringing a claim on their behalf.

In Co-op Retail Services Ltd v. Taylor Young Ltd[2002] 1 WLR 1419 (HL) the House of Lords considered a similar argument to that advanced by BMT. Lord Hope set out the argument at [39]; and having considered the authorities, concluded that the issue was to be determined by the terms of the contract, see [45]. In short, if ‘there is no liability to pay compensation’ in circumstances where ‘the ordinary rules for the payment of compensation for negligence have been eliminated’, then a party in the position of the Owners would not be entitled to claim compensation and a party in the position of BMT cannot make a claim for contribution under the 1978, see [48] and [50].

As an alternative argument, Mr Cooper submitted that even if there is now no existing liability sufficient to satisfy the requirements of ss.1(1) and 6(1) of 1978 Act, such liability existed at the time of the fire and BMT are entitled to rely on s.1(3) of the Act to make good their claim against LWB. He submitted that wording of that subsection was wide and should be given its ordinary and natural meaning. He argued that the Court should follow the decision and reasoning of Hobhouse J in RA Lister & Co Ltd v. EG Thompson (Shipping) Ltd (The Benarty) (No.2) [1987] 1 WLR 1614, where it was held that the relevant date for establishing liability was the time that the damage was suffered.

The argument proceeds on the basis that the liability existed but ceased between the time the loss occurred and the compensation was sought. The interrelationship of ss.1(3) and 1(6) was another issue considered by the House of Lords in the Co-op Retail Services Ltd case. At [52-60] Lord Hope clearly rejected the argument advanced by Mr Cooper; and in doing so declined to follow the views of Hobhouse J in the Benarty (No.2). Lord Hope conducted a thorough review of the relevant cases, and concluded that the relevant time for determining whether a person was liable was the date when the contribution was claimed. Lord Bingham expressly agreed at [9].

Mr Cooper submitted that the observations were not necessary for the decision in that case and were not binding; and that this Court should adopt its own analysis and should form its own conclusions on the point. In my view this submission is unrealistic. Where a matter is fully argued and considered by the Court of Appeal and in speeches of members of the House of Lords, even if it were inclined to another view, a First Instance Court should be very slow to come to a different conclusion. Here the observations of the Court of Appeal and the House of Lords were not parenthetical but fully considered conclusions, and the views were unanimous. In such circumstances it is very likely that these Courts would come to the same conclusion if the matters were argued again. In any event I agree with the conclusions of Brooke LJ in the Court of Appeal and Lords Hope and Bingham in the House of Lords.

Finally Mr Cooper submitted that it was appropriate to give BMT a right of contribution in this case, since it would be unjust if BMT were left without any right of contribution in circumstances where it had no role to play in either negotiating the contract or placing the Insurance Cover. It seems to me that, attractively as it was expressed, this did not impact on the analysis.

It follows that I answer the questions posed by issue (c), no.

The parties have agreed as to how the question posed by this issue should be answered.

In the absence of express contractual provision, section 347(1) of the German Civil Code provides that LWB was under a duty to exercise the standard of care and skill to be expected by an ordinary German or West European shipyard. In addition to this statutory standard of care, LWB owed Owners a contractual duty of skill and care under Article I.1 of the Conversion Contract. The nature of that contractual standard of care is, for all relevant purposes, identical to the German statutory standard.

In relation to LWB’s specific duty to exercise reasonable skill and care to minimise the risk of fire during the course of performing the Conversion Contract, LWB was under a duty to adhere to any special regulations containing the technical standards of care expected in relation to prevention of fire. The scope of any such regulations would inform the content of the standard of care to be expected.

LWB would be liable for the acts or omissions of its employees or sub-contractors when such acts or omissions are committed during the course of the performance of the Conversion Contract.