UK: Supreme Court Construes Charter Party Indemnity

Last Updated: 12 November 2010
Article by Nick Burgess and Sacha Christopher

Farstad Supply AS v Enviroco Ltd and another (The MV Far Service) [2010] UKSC 18

The litigation in these proceedings originated in the Scottish courts but subsequently went on appeal to the UK Supreme Court who considered amongst other things how the indemnity/ exceptions clause in a charter party governed by English law should be interpreted. It was held that the wording of the indemnity/ exceptions clause was (1) wide enough to exclude the charterer's liability to the owner for damage to the vessel caused by the charterer's own negligence, and (2) that it successfully operated as an indemnity clause in respect of claims by third parties. In the words of Lord Mance, the language of the relevant clause "operates as a series of indemnities against third party exposure combined with exclusions of direct exposure to the other contracting party. This is both what the heading of clause 33 and what common commercial sense would lead one to expect under a scheme clearly intended to divide risk between the contracting parties."

Background

In 2002, an oil rig supply vessel called the Far Service was damaged by a fire whilst berthed in Peterhead harbour. The owner of Far Service was a company called Farstad and they had chartered the vessel out to Asco who in turn had engaged another company called Enviroco to clean out some of the vessel's tanks. During the cleaning process, Asco instructed the Master to start up the engines so that the vessel could shift berths. At the same time, an Enviroco employee inadvertently opened a valve, releasing oil into the engine room. The oil ignited due to the hot condition of the engines and there was a fire which caused serious damage.

Farstad sued Enviroco in tort. Enviroco denied liability but they said that, even if they were liable, the fire was materially contributed to by the negligence of both Farstad and Asco. Consequently, Enviroco brought in Asco as a third party, arguing that if it were liable to Farstad, it would be entitled to a contribution from Asco under the relevant Scottish legislation. However, the charter party between Asco and Farstad contained an indemnity / exceptions provision, the relevant part of which states as follows:

"33.5...the Owner shall defend, indemnify and hold harmless the Charterer, its Affiliates and Customers from and against any and all claims, demands, liabilities, proceedings and causes of action resulting from loss or damage in relation to the Vessel (including total loss) or property of the Owner, including personal property of Owner's Personnel or of anyone for whom the Owner may be responsible on the Vessel, irrespective of the cause of loss or damage, including where such loss or damage is caused by, or contributed to, by the negligence of the Charterer, its Affiliates or Customers." (emphasis added).

In short, the issue before the Supreme Court was therefore how the above clause would be construed in the light of Section 3 of the Law Reforms (Miscellaneous Provisions) (Scotland) Act 1940, entitled "Contribution among joint wrongdoers" which allows a person who has been found liable in an action and has to pay out damages as a result to seek and recover a contribution from any other person who, "if sued, might also have been held liable" in respect of that same loss or damage. Farstad argued that the above clause exempted Asco from liability in the present circumstances so that Asco was not a person who, "if sued, might also have been held liable". Essentially, the question was whether the clause excluded Asco's liability to Farstad in respect of damage to the vessel caused by Asco's own negligence.

At first instance, the Scottish court held that Enviroco were not entitled to a contribution from Asco. On appeal, that decision was reversed by a majority. The matter subsequently came before the UK Supreme Court.

Supreme Court decision

The five lords of appeal in the Supreme Court were unanimous that clause 33.5 excluded Asco's liability to Farstad in respect of damage to the vessel caused by Asco's own negligence.

Lord Clarke's judgement highlighted the fact that the vessel was chartered for work in the oil rig supply industry and the charter was a comparatively long term contract (originally for a five year period but subsequently extended by agreement). He added that the clause contained a division of responsibility between the owner and charterer of a type which has become familiar.

Lord Clarke stated that pursuant to clause 33.5, the owner was obliged to "defend...and hold harmless" the charterer, not only against liabilities and causes of action, but also against "all claims, demands" and "proceedings". The natural meaning of that expression was that since Farstad must hold Asco harmless from a claim by Farstad in respect of damage to the vessel caused by Asco's negligence, Asco could therefore not be liable to Farstad in respect of such damage. He added that the word "indemnify" could sometimes mean indemnify a third party, depending on the context. Here, he believed the context was plain and that the expression "defend, indemnify and hold harmless" was wide enough to encompass the exclusion of liability for loss incurred by the owner or charterer as the case may be.

He was fortified in reaching this conclusion by clause 33.11 which provided inter alia that

"a) Owner shall defend, indemnify and hold harmless Charterer from any consequential or indirect losses that Vessel Owner may suffer as a result of the performance of the Charter.
b) Charterer shall defend, indemnify and hold harmless Vessel Owner from any consequential or indirect losses that Charterer may suffer as a result of the performance of the Charter."

The judge commented that the significance of these clauses for present purposes was that they plainly operated as exceptions clauses against liability for loss and that the language used was the same as in clause 33.5. In his opinion, they showed that in this charter party, the expression "defend, indemnify and hold harmless" was wide enough both to provide a defence for one party to claims made by the other party and to provide an indemnity in respect of the claims of third parties.

In all the circumstances, therefore, Lord Clarke concluded that the effect of clause 33.5 was inter alia to exclude the charterer's liability in respect of damage caused to the vessel by its own negligence and therefore Asco would have had a defence against an action brought by Farstad to recover any losses arising from this damage. Consequently, Enviroco was not entitled to a contribution from Asco under the relevant Scottish legislation.

Furthermore, Lord Clarke concurred with Lord Mance as to what the position would have been had the charter party provision been construed not as an exception clause but only as an indemnity. Lord Mance had commented that if that were the case, any claim by Enviroco against Asco would be met by Farstad with the defence of circuity of action. In other words, if Asco was in principle liable to Farstad, it would be entitled to be immediately indemnified by Farstad, which would be bound to repay the amount of the liability. In those circumstances, it would be useless to give judgement for Farstad against Asco. Lord Clarke concluded that clause 33.5 protected Asco against the possibility of a judgment being given against it, whether it is construed as an exceptions clause or as a narrow indemnity clause.

Comment

The Law Lords gave effect to what they adjudged to be the deliberate contractual arrangements between Farstad and Asco apportioning risk between them as owner and charterer under the charter party. As Lord Mance opined, the obvious intent was that Farstad should insure against all risk of loss to their property and that of their personnel and others for whom they were responsible, while Asco would insure against all such risks to their own as well as their affiliates' and customers' property.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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