| Date | 2 June 2004 |
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| Judgment | BP Exploration Operating Co Ltd v Kvaerner Oilfield Products Ltd, QBD 7 May 2004 |
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| The Issue | Whether a contractor will be protected as an insured party under a construction all-risks policy procured by the operator. |
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| Implication |
Whether a contractor will obtain full protection under a contractor's all-risk policy and benefit from a waiver of subrogation rights from the insurer will depend on the precise wording of the contract agreements entered into between the parties. |
printThe recent case of BP Exploration v Kvaerner Oilfield Products examined whether an insurer providing a contractor's all-risk policy is entitled to recover from the contractor monies that it has paid out following of a claim under the policy. The disputes arose out of development works carried out by Kvaerner for BP at the north sea oil fields of Schiehallion and Loyal. Kvaerner had entered into contracts with BP for front end design, engineering, procurement and development work for the installation of sub sea control modules and directional control valves located on top of the well head on the sea bed. Soon after installation, faults were discovered in the sub sea control modules. The directional control valves were also found to be faulty in that corrosion of the valves had led to leakage. It was alleged that the valve components had been made out of unsuitable material. BP alleged that these faults had given rise to physical loss or damage to adjacent equipment on the sea bed, and in consequence, claimed it had suffered a loss of over £13.5 million, including the cost of retrieving the equipment from the sea bed, repairing or replacing the damage and reinstallation. In due course, some £7 million of those claims were met by the insurers carrying the construction all-risks policy for the project works. Having paid those monies out, exercising its so-called 'subrogation' rights, the insurers then commenced proceedings against Kvaerner. Kvaerner responded by saying that it should be covered by the same policy in respect of the same loss and damage that BP had placed for the project as a whole. Whether BP's insurers were free to bring this claim against Kvaerner using their rights of subrogation therefore became a preliminary issue heard by Mr Justice Colman in the Commercial Court in London. Justice Colman confirmed that the essential issue which fell to be determined was whether BP, under its contract with Kvaerner, undertook to procure insurance cover for Kvaerner which was sufficiently extensive in scope to cover the loss and damage claimed against Kvaerner. It was therefore necessary to look into the key provisions of the insurance policy and the contracts entered into between BP and Kvaerner. Clause 10.5 of the contract between BP and Kvaerner was a key provision as far as the dispute was concerned. It provided that "without prejudice to the contractor's liabilities and obligations BP shall take out and maintain from the commencement of this development contract an insurance policy which will give, subject to its terms and conditions, protection against risk of physical loss or damage and against general third party liability arising from the performance of the development services. The contractor, subcontractors and other contractors engaged in the installation will be covered under the policy as other assureds and will therefore have similar benefits under the policy to BP". The contractor's all-risks policy taken out by BP, as would be expected, clearly provided insurance against the risks of physical loss or damage during the various operations of the development works. The contractors, subcontractors and suppliers were included as assured parties under the policy, and by condition six of the policy, the insurers agreed to waive their rights of subrogation against any assured party. BP accepted that it was obliged to maintain contractor's all-risks insurance for the benefit of Kvaerner in the manner set out within the contract. It argued however that the cover which it was obliged to procure for Kvaerner's benefit was in respect physical loss or damage arising from the performance of the contract after manufacture and delivery of equipment by Kvaerner. According to BP, there was no obligation on BP to have insurance in place that embraced losses and damage flowing from events occurring during manufacture. Mr Justice Colman noted that, if that was the correct meaning of the clause, its effect would be to limit quite substantially the cover to be provided for Kvaerner. Kvaerner argued by contrast that taking the contract as a whole, it was the mutual intention of the parties that BP should procure insurance for Kvaerner which covered the entire ambit of the design, manufacture and development services to be provided by them under their contracts with BP. Kvaerner noted that both the invitation to tender and their tender made it clear that their price had not taken into account the cost of construction all risks insurance and that it was entirely normal that such insurance should be provided by BP. This was also, according to Kvaerner, entirely consistent with the alliancing agreement that the parties had intended to enter into which required that the project should be performed within an environment of trust, commitment and honest communication. Mr Justice Colman recognised that he was looking for an interpretation of the various contract terms which identified the mutual intention of the parties and which did not flout business common sense. He was not particularly persuaded that the alliance agreement added much to the argument. On balance, however, he concluded that BP was obliged to provide Kvaerner with the benefit of a contractor's all-risk policy which was entirely co-extensive with that which was available to BP. The insurance should therefore cover the performance of the entirety of the contractor's obligations under its contracts with BP. It followed that Kvaerner was entitled to the benefit of the insurance cover provided by BP's policy and that the subrogated claim made by the insurers against Kvaerner would fail.
CJ-0422
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