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Drafting an effective liability cap against thirdparty losses can be problematic, as has beendemonstrated in the recently decided case of

Westerngeco Ltd -v- ATP Oil & Gas (UK) Ltd.1

While this case arose in the context of a contract for the

provision of offshore seismic survey work under the LOGIC

CRINE standard terms for the UK oil and gas industry, it

raises important issues of general application which are

particularly relevant to anyone dealing with the provision

of services by contractors, including for example, in the

context of PFI/PPP projects and/or where a party to a

contract takes a contractual responsibility for third party

losses.

Broadly, the case demonstrates that where a contractoragrees with a company that it will accept liability for third

party losses up to a specified amount then, unless the

company agrees to indemnify the contractor for losses in

excess of that cap, the contractor will be unable to recover

such losses should the third party sue the contractor direct.

By contrast, the limit on liability will be effective to limit

the contractor's liability should the third party sue the

company. The case also provides a useful insight into the

court's approach to construing contractual terms.

Facts

In March 2004, ATP Oil & Gas (UK), a company engaged in

offshore oil and gas development and production activities

(the company) entered into a contract with Westerngeco

(the contractor) for the provision by the latter of seismic

survey work. The contract was based on the LOGIC CRINE

standard terms for the UK offshore oil and gas industry,

with some amendments.

Under the standard provisions of the contract, the

contractor was responsible for third party losses (i.e.

personal injury or property damage) arising from the

performance of the contract to the extent that such losses

were caused by its negligence, and was also obliged toindemnify the company for losses arising in this way.

The contract also followed the standard LOGIC CRINE

"knock-for-knock" liability framework, whereby each party

was responsible for, and had to indemnify the other in

respect of, any damage to its own property, theinjury/death of its own employees, pollution emanating

from its own property/equipment/reservoir and its own

consequential losses, regardless of fault.

Crucially, the parties specifically negotiated and inserted

into the contract a clause seeking to cap the contractor's

liability, under which the "Contractor's liability under this

Contract" was not to exceed the aggregate amount of

payments received by it for the work done and the

company was to indemnify the contractor for any amounts

in excess thereof.

During the course of carrying out its work, the contractor

damaged a wellhead marker buoy belonging to Total E & P

UK Plc (Total), a third party. It was common ground that the

damage was caused by the contractor's negligence.

Total brought a claim against the contractor and the

contractor sought a declaration that in accordance with the

contractor's liability cap clause, the company was liable to

indemnify the contractor for the amount of the contractor's

liability to Total which was in excess of the aggregate

amount of payments received by the contractor for the

work it performed.

The issue before the court was whether the meaning of the

phrase "liability under this Contract" within the contractor's

liability cap clause was wide enough to extend to the

contractor's liability to Total.

Held

In giving his judgment, Aikens J adopted the approach to

construing contracts set out in BCCI -v- Ali2, namely that the

objective of the court is to give effect to the parties'

intentions and that in order to ascertain the parties'

intentions, the court will:

January 2007

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Efficacy of a contractor's liability capagainst third party losses

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read the terms of the contract as a whole;

give the words used their natural and ordinary meaning

in the context of the agreement; and

consider the parties' relationship and all the other

relevant facts surrounding the transaction so far as

known to the parties at the time it was made.

The court does not enquire into the parties' subjective

states of mind but makes an objective judgment based on

the issues identified above.

Interestingly, Aikens J specifically noted the fact that both

parties were sophisticated market players in an industrywhere legal advice was usually taken over contracts which

were subsequently drafted with great care. This was an

important element in ascertaining the parties' intentions. It

was clear how responsibility was to be divided; the parties

had obviously allocated the various risks (and duties to

insure against them) very carefully between them.

Although the clause in question was specifically negotiated

for that particular contract, it must be construed in this

light.

In applying the above principles, it was held that the

natural meaning of "liability under this Contract" was, first,a legal (as opposed to some moral or non-legal) liability.

Secondly, the phrase had to mean a legal liability to the

counterparty (i.e. the company) as opposed to someone

who is not a party to the contract or who could not take the

benefit of its terms. Thirdly, the phrase contemplated a

liability to pay over money.

Given that the terms of the contract stipulated that, as

between the contractor and the company, the contractor

was responsible for third party losses arising from its

negligence, there was no legal liability on the contractor to

pay anything over to the company in respect of such losses.

That being so, there was nothing in respect of which the

company was obliged to indemnify the contractor if there

was an excess above the aggregate payments received by

the contractor for the work done under the contract.

Therefore, the contractor was not entitled to the

declaration sought, nor to an indemnity from the company.

Comment

The case shows the difficulty in limiting a contractor's

liability against third party claims.To do so effectively in

circumstances where the contractor takes the responsibility

for third party claims arising from its own negligence, clearwords are required to provide the contractor with an

indemnity from the company in respect of the amounts

that the contractor may have to pay to the third party as a

result of the negligent acts of the contractor.3

Failing to use clear words to this effect would mean that

the operation of the liability cap will depend on the

external decision of a third party as to whether to sue the

company or the contractor. If the third party chooses to sue

the company and the company incurs financial loss by

having to pay the third party claim, then the contractor will

be protected by the liability cap. This is because the

obligation of the contractor to indemnify the company in

respect of such losses will constitute a "contractual liability"as opposed to a mere "responsibility". By contrast, if the

third party chooses to sue the contractor, the contractor will

not be able to rely on its liability cap in the absence of an

express contractual counter-indemnity from the company.

Arguably, the same analysis could be adopted in respect of

"knock-for-knock" liabilities where, for example, the

contractor's employees bring a claim against the contractor

and not the company. In line with the above analysis (and

putting aside any employee insurance issues), the

contractor would not be able to rely on its liability cap

unless a counter-indemnity from the company is expresslyincluded in the contract.

The reference to the sophistication of the parties reinforces

the general approach of the courts that the more

commercially and legally experienced the parties are, the

more emphasis will be given to the precise words of the

contract and all the subtleties those chosen words entail.

Notes:

1 [2006] EWHC 1164.

2 [2002] 1 AC 251.

3 This reflects the principle stated in Brown -v- Drake International Ltd and

Southampton Container Terminals [2004] EWCA Civ 1629 that an

indemnity will not readily be given to a party against a loss caused by itsown negligence.

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

For more information please contact us at Broadwalk House 5 Appold Street London EC2A 2HA Tel +44 (0)20 7638 1111 Fax +44 (0)20 7638 1112www.ashurst.com 2006 Ashurst Ref:DTP/4355 Jan 07

Contacts

Geoffrey Picton-Turbervill

Head of Global Energy

T: +44 (0)20 7859 1209

E: geoffrey.picton-turbervill@ashurst.com

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Professional Development Lawyer

T: +44 (0)20 7859 1166E: ruth.jaun@ashurst.com