Parties contemplating joint venture arrangements ("JVs"), contractual or otherwise, may be tempted to exert de facto control over the JV in question, notwithstanding the independence or separate legal character of the latter. They should be wary of doing so. In his recent Judgment1 as to which party should be vicariously liable for the Terminal Supervisor whose negligence substantially caused the December 2005 explosion at Buncefield oil terminal, Steel J. held that one of the JV partners (Total Downstream UK PLC) rather than the JV itself (Hertfordshire Oil Storage Ltd ) was liable, in negligence, in nuisance and under a rare application of the rule in Rylands v Fletcher2.

For liability insurers, the extent to which prospective assureds may control JVs to which they are party, and the resulting liability exposures which they may have for the JV activities, is an important enquiry as to which underwriters ought to satisfy themselves. Is there a potential liability arising from JV participation and are they prepared to cover it? If so, on what terms?

The Facts

At 6 a.m on Sunday 11 December 2005, there was an explosion at the Buncefield Oil Depot. It measured 6.4 on the Richter scale, could be heard 200 kilometres away, burned oil reserves for several days, caused extensive damage to local properties and interruption to local business which were not accessible for weeks, and resulted in £700-£750 million of damage and loss.

The depot was nominally operated by Hertfordshire Oil Storage Limited ("HOSL"), a JV vehicle 60%/40% owned by Total and Chevron respectively. However the operational duties of the oil terminal were sub-delegated by the JV vehicle to Total staff. There was no dispute that the explosion was caused, at least in part, by the negligence of a Terminal Supervisor, Mr Nash. Total had its own operations at Buncefield, which neighboured those of the JV, and employed the Buncefield Terminal Manager and Terminal Supervisors, including Mr Nash. However, Total argued that it had seconded Mr Nash to the JV operation. There was therefore a dispute between Total and the JV itself (supported by Chevron, Total's JV partner) as to which of Total or the JV was vicariously liable for the damage resulting from the explosion caused by Mr Nash's negligence.

Steel J.'s Judgment runs to over 140 pages, and touched on many ancillary issues. However, the essence of it, for JVs, is that where the court cannot determine, from the JV documentation, which party is to bear liability for loss arising from JV activities, the court will look to the manner in which the JV was operated, as a matter of fact, to determine which party had de facto control of the employees whose conduct caused the damage. In the case of Buncefield, that party was Total, not the JV.

Although a number of contemporary documents suggested that HOSL, the JV, was operating the Buncefield terminal, after an extensive review, Steel J concluded that the JV Operator's functions had largely been delegated to Total. Total's Terminal Manager at Buncefield, not the JV vehicle, controlled Mr Nash.

Consequently, Total, as opposed to the JV, was vicariously responsible for Mr Nash's negligence. Nor could Total look to the JV itself, or to its JV partner (Chevron), for an indemnity as to Chevron's 40% share in the JV vehicle.

Future Guidance

The factual ingredients which Steel J. found were evidence of Total's "control" offer guidance to potential JV participants who wish to avoid vicarious liability for JV operations. Firstly, the person with authority to instruct Mr Nash as to the manner in which he conducted tank filling operations, was Total's Terminal Manager at Buncefield, Mr White. Mr White reported directly to Total's head office. In contrast he rarely (only twice a year) reported to the Board of the JV. Secondly, all staff at the JV site were engaged and paid by Total and were subject to Total's promotion and disciplinary arrangements. Thirdly, their place of work was allocated by Total and all instructions relating to safe operation of the site were promulgated by Total which completed the statutory notice to the Health & Safety Executive. Indeed, Steel J held that, aside from its vicarious liability, Total itself had contributed to the explosion by failing to promulgate an adequate system to prevent a refilling of the site and this fault could have been laid at the door of Total's head office.

Footnotes

1. Colour Quest Ltd & others v Total Downstream UK PLC, (20 March, 2009)

2. If material stored on party A's property escapes and, as a consequence, causes damage or loss to a neighbouring party B (as to his property or to his business), Party A can be liable for the loss or damage in question.

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.