| Date | 9 May 2001 |
|
|
| Judgment | BHP Petroleum Ltd -v- British Steel plc Court of Appeal 7 April 2000 |
|
|
| The Issue | Interpretation of exemption and limitation clauses. |
|
|
| Implication |
Providing a clause is entirely clear and unambiguous, a contractor or supplier can limit the period within which claims must be brought, and limit the amount of liability to which it might be exposed. Exclusion clauses will entirely exclude certain classes of liability if clearly drafted. |
printIt is commonplace in the oil and gas industries for contractors and suppliers to place limitations upon their liability to the project Owner in respect of damages arising from breach of warranties given by the contractor against faulty design, materials and workmanship. Such contracts will often also exclude liability for so-called "consequential" losses, such as loss of production or loss of profits that the Owner may incur as a consequence of defects in the works. The commercial justification for such exclusions or limitations is clear. Oil and gas projects can concern massive developments, with the potential for losses which can be out of all proportion to any profit a contractor or supplier might hope to make out of its contract. In BHP Petroleum -v- British Steel the Court of Appeal closely examined such clauses. BHP Petroleum are operators of the Liverpool Bay oil and gas production complex. The complex centres on the Douglas Field Platform, from where oil is sent to an offshore tanker loading terminal and gas is sent by an undersea pipeline to the mainland. The platform also sends gas by undersea pipeline to one of its satellite rigs, where it is re-injected into the natural reservoirs. This serves a dual purpose. Injected under pressure into the oil reservoirs, the gas takes the place of water which might otherwise be pumped in to drive the oil out. The process therefore assists the extraction of the oil. It also means that the gas remains stored underground and is available for re-extraction at some future date. British Steel were the suppliers of coated steel pipeline for the gas re-injection line. The pipes were welded together and laid on the seabed by other contractors in June 1994. The pipeline was then filled with seawater treated with a corrosion inhibitor to await its entry into service. This did not occur until more than two years later. Soon after the pipeline was brought into service, defects appeared when gas bubbles were observed on the surface of the sea. Investigations were made and BHP alleged that the cause of the defects was cracking caused by corrosion-related stress, which they attributed to defects in the steel pipes themselves. In the final outcome, the defective pipeline was not rectified at all, because it was not economic to do so. It was abandoned and a second pipeline installed in its place. BHP claimed substantial costs from British Steel, including a sum of the order of £136 million arising from a claimed deferral of production. British Steel sought to rely on two clauses of their contract in their defence. The first clause, it argued, limited its liability to fifteen percent of the relevant part of the contract price. Furthermore, British Steel argued, this clause brought an end to all liability under the contract for defects which had not appeared within two years of delivery of the pipelines. These provisions were contained within amendments to a defects liability clause, often called a 'rectification' clause. By this clause the parties had agreed that British Steel would remedy, at its expense, defects in the work due to faulty design, materials or workmanship, which appeared within a cut-off period of 24 months after delivery of the pipes. Rectification clauses of this type give the Owner the right to require the supplier or contractor to remedy defects which arise during the stated period. The clause also gives the contractor or supplier a corresponding right, which may be valuable to it, to insist upon carrying out such rectification work. Clauses of this type, therefore generally create additional rights for each party, but they do not normally exclude the contractor's liability for breaches of other terms of the contract. This clause however was different. It stated that once the time period had elapsed, "all liability of the supplier relating to the work shall terminate". It also stated that British Steel's liability to pay the costs of uplifting and replacing pipe work would be limited to fifteen percent of the contract price. These further provisions had been inserted at the suggestion of British Steel. Lord Justice Evans noted that clauses such as this, which limit the time within which a claim must be brought and which limit the sum which might be claimed, were not to be construed in such a hostile fashion as clauses which exclude liability altogether. However, the clause in its amended form had been drafted at the suggestion of British Steel and thus the contra proferentem rule should apply. Thus, if there were any ambiguities in the clause, these would require to be resolved in favour of BHP Petroleum. Lord Justice Evans concluded that the words were clear and unambiguous and British Steel was entitled to rely upon them to exclude its liability since the defects had not been brought to its attention until after expiry of the 24-month rectification period. The second clause which British Steel relied upon provided that neither party should bear any liability to the other for loss of production, loss of profit, loss of business or any other indirect losses or consequential damages. Strictly speaking, the Court was not required to consider this clause since the contractor's liability had been excluded by the time bar contained in the first clause. However, the court ruled that a 'deferral of production', which was no more than an accountancy exercise to calculate the present capital value of the delayed income stream from the project, was in effect a loss of profits which would be excluded by the second clause relied upon by British Steel.
CJ-0118
|
|||
|
© Brewer Consulting |
|||
 |
|||