UK: Seadrill v Gazprom - The Dangers of Exporting Contract Forms

Last Updated: 9 July 2010
Article by Judith Aldersey-Williams and Norman Wisely

A recent decision of the Court of Appeal provides a relatively rare and interesting insight into the approach of the English courts to the interpretation of oil and gas contracts and also the dangers of taking a contract drafted for one jurisdiction and applying it in another without careful thought.

This case concerned a contract under which Gazprom contracted Seadrill to drill wells in India. While pre-loading the legs before jack-up for the first well the rig was damaged and had to be taken to Singapore for repairs.  The parties then fell out and the rig never returned to the wellsite.  At trial Seadrill admitted negligence and the main question was what sums could be recovered by Gazprom.   Seadrill claimed for unpaid hire while Gazprom argued that any liability for this sum should be set off against the direct costs which Gazprom had incurred arising out of the incident and which were due from Seadrill.  Seadrill argued that under the contract it had no liability for any such direct losses.  Seadrill also tried to argue that Gazprom should pay for the damage to the rig on the basis of a clause dealing with unforeseen seabed conditions. The parties had used a standard form contract for offshore international drilling daywork issued by the US-based International Association of Drilling Contractors, but had chosen to have the contract governed by English law.

At the trial of the case the judge decided:

  • Although the development of the IADC form could be considered as part of the "factual matrix" to be considered when interpreting the contract, because the contract was governed by English law normal English principles of interpreting contracts should apply and commentaries from US perspective should not subvert those principles.
  • Although the contract did not include any express warranty as to the standard of performance Seadrill would provide, English law implies into service contracts a provision that services will be supplied with reasonable skill and care and the negligence of the Master amounted to a breach of this implied term.
  • Clause 901 in the contract said "It is the intention of the parties hereto that the provisions of [certain clauses] shall exclusively govern the allocation of risks and liabilities of said parties without regard to cause ... it being acknowledged that the compensation payable to Contractor as specified herein has been based on the express understanding that risks and liabilities shall be determined in accordance with the provisions of this Contract." The judge held that this meant that where the indemnity provisions applied, they applied regardless of whether the loss resulted from negligence or any other cause.  It did not, however, mean that the indemnity clauses were the only provisions that applied in the event of any breach of contract.  In other words, as long as the kinds of losses which Gazprom was seeking were not the kinds of losses covered by the indemnity clauses (property damage or personal injury) then Gazprom could still claim them under general contract law principles.
  • The indemnity clause contained one of the more common exceptions to the "mutual hold harmless" indemnity regime.  It provided for Gazprom to indemnify Seadrill for damage to the rig resulting from "faulty bottom conditions" - Seadrill maintained that this provision applied regardless of Seadrill's negligence but the judge decided the clause applied only if there were in fact faulty bottom conditions and in this case the seabed was fine - it was Master who was at fault.

The Court of Appeal upheld the original trial judge's decision on all grounds. 

The parties had agreed that "Except for such obligations and liabilities specifically assumed by Contractor, Operator shall be solely responsible and assumes liability for all consequences of operations by both parties while on a daywork basis, including results and all other risks or liabilities incurred in or incident to such operations, notwithstanding any breach of representation or warranty, either expressed or implied, or the negligence or fault of Contractor...." 

It is possible that the intention of the drafters of the IADC form in including these words was to create a contract under which the driller would have little or no liability for any breach of contract  - certainly Seadrill's legal team cited to the court an article by a leading US practitioner which made the point that this argument was possible.  However, the Appeal Court did not accept that the contract should be interpreted in this way.  Seadrill had agreed to operate the rig.  This amounted to a specific assumption of the normal liability which flows from agreeing to provide services, namely a liability for failing to provide those services with reasonable skill and care.  Very clear words would be needed in the contract to find that such liability was excluded and no such clear words were found by the Court.  

An ancillary issue which the court considered was whether, when ascertaining the intentions of the parties with a view to construing the contract, it was legitimate to have regard to the history of the amendments that had been made to the IADC standard form, as part of the commercial background.  The judges doubted whether it was legitimate to simply compare the later and earlier versions of a standard form on the assumption that both parties knew of the differences and had adopted a particular version for a reason.  They held that in this case, since there was no evidence of the parties consciously adopting the later version of the standard form by having regard to the differences in them, there was a real likelihood that the parties "simply reached for the current form without any consideration of the earlier form".

This case is a reminder, if more reminders were needed, of the importance of clear drafting when dealing with liability issues.  But it is also a reminder that taking a contract drafted in one jurisdiction and using it another jurisdiction is always fraught with risk, particularly where the governing law is also changed.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 06/07/2010.

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