UK: Liability And Indemnity Clauses: The Need For Careful Drafting

In the recent case of WesternGeco Ltd v. ATP Oil & Gas (UK) Ltd Aikens J re-affirmed the decision of Lord Bingham in Bank of Credit and Commerce International SA (in liq) v. Ali that to ascertain the intentions of the parties when interpreting a contract, the courts should look objectively at the facts and materials before them. In WesternGeco, the court decided that although the clause in question was negotiated separately from the rest of the standard form contract, the intentions of the parties should still be obtained by viewing the contract as a whole.

Introduction

• The contract between ATP Oil and Gas (UK) Ltd ("the Company") and WesternGeco Ltd ("the Contractor") was for the provision of seismic services by the Contractor and was made on industry standard CRINE (now LOGIC) terms, with additional clauses being negotiated by the parties.

• Clause 19 made the Contractor liable for any damage caused to third parties by the negligence of the Contractor. The contract also contained a separately negotiated clause, clause 19.8 that required the Company to indemnify the Contractor in case of any "liability under this contract" that exceeded the aggregate amount of payments the Contractor would receive under the contract.

• While carrying out the work the Contractor negligently damaged the property of a third party, Total E & P UK Plc. Total brought a claim against the Contractor. In that case the issue of negligence was not in dispute as it had been accepted between the parties. The amount sought by Total exceeded the amount that the Contractor received under the contract, hence the Contractor sought to rely on clause 19.8 and to be indemnified by the Company for the amount in excess of the payments it received under the contract.

Judgment

• The court considered the term "liability under this contract" to decide whether the Company was required to indemnify the Contractor for such excess.

• In establishing the meaning of that term the court looked at the construction of the contract as a whole, to determine the intentions of the parties, even though the contract was a standard form contract and the clause in question had been separately negotiated by the parties.

• Looking at the contract as a whole Aikens J decided that there was a clear distinction in the contract between liability between the parties to the contract and that to third parties.

• Therefore, applying this distinction to clause 19.8 Aikens J construed the meaning of "liability under this contract" to mean only liability as between the parties to the contract. Hence not the liability to Total, the third party. The Contractor could not therefore claim the excess over its contract receipts from the Company under the indemnity in clause 19.8.

This decision does not create any new legal principle. Instead it re-iterates the need, when drafting a contract, irrespective of whether it is standard form or not, to look at the contract as a whole. This is particularly true of liability and indemnity clauses in contracts in the oil and gas industry. The need for special care is all the more critical as Aikens J made it very clear that the more commercially and legally aware the parties, the more the court will look at the precise wording of the contracts in its interpretation of the intentions of those parties.

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

The original publication date for this article was 18/12/2006.