| Date | 7 June 2006 |
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| Judgment | Enterprise Oil Limited v Strand Insurance Company Limited, QBD 26 January 2006 |
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| The Issue | Whether settlement agreements can be used to ascertain loss in the context of subsequent insurance claims. |
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| Implication |
A settlement agreement is no more than evidence of a loss which may be claimed under an insurance policy. If a settlement agreement is challenged the question of whether there has been a loss covered by the policy terms may be decided on evidence that is extrinsic to the settlement agreement itself. |
printIn early 1990 three oil companies, Amoco, Amerada Hess and Enterprise Oil, now part of the Shell Group, entered into an operating agreement to explore and develop certain North Sea oil fields. Amoco, in turn, entered into a contract with British American Offshore (BAO) to hire a jack-up drilling rig known as the Rowan Gorilla V (RGV) to undertake the exploration works. It was agreed that the RGV contract would continue for a term of at least one year at a hire rate of US$175,000 per day. BAO was a wholly owned subsidiary of an American company, Rowan, and under the terms of a service agreement between them, BAO had agreed to pay Rowan the entirety of the income it made under the RGV contract. That, unfortunately, never happened. Within one month of delivery of the RGV, Amoco purported to terminate the RGV contract alleging that the delivery of the unit was late and that it was defective. Enterprise, as one of the co-venturers with Amoco, agreed and supported the termination of the RGV contract. These events led to two sets of legal proceedings, one in the Commercial Court in England and the other in Texas. Both proceedings were started on the day of the purported termination. In the UK court, BAO claimed that the termination by Amoco was invalid and sought payment of the daily hire rate for the minimum period of one year. This amounted to some US$65m together with further damages and interest. At the conclusion of a lengthy trial the UK court agreed that Amoco had had no right to terminate the RGV contract either under its terms or at common law. The court awarded damages against Amoco totalling US$73m and ordered Amoco to pay costs approaching £10m. Enterprise was not a party to this UK litigation, but it was however obliged to contribute to the sums awarded against Amoco under the terms of the operating agreement and accordingly contributed approximately US$80m together with £2.5m in respect of the costs. The second set of proceedings following the termination of the RGV contract took place in Texas between BAO’s American parent company, Rowan, and each of the joint venture oil companies. Against Enterprise it was alleged that they had ‘tortuously interfered’ with the Rowan/BAO service agreement giving rise to certain fairly inventive consequential loss claims. By way of example, Rowan claimed that, but for the tortuous interference, the revenues generated by the RGV contract would have permitted BAO to buy back Rowan’s shares which it would have resold one year later at a profit of some US$52m. In proceedings that would feel quite alien to a UK lawyer, these various claims were heard before a mock jury trial in Texas before the real trial was due to begin. Each side made presentations for two hours and then the judge gave a written direction to the mock jury. Although it awarded nothing for the losses related to the share buy-back claim, the mock jury nevertheless held that Rowan was entitled to some US$85m in damages. Spurred on by this award, a settlement agreement was subsequently signed by the parties in which the joint venture oil companies agreed to pay Rowan a sum of US$175m, inclusive of the amount which had been awarded in the UK court. Arising out of this agreement, proceedings were commenced by Enterprise against their captive insurers, Strand, for an indemnity in respect of its proportion of the settlement sums. The settlement agreement did not apportion particular sums to particular causes of action or heads of damage. This structure of the settlement agreement, or rather the lack of it, potentially gave rise to one of the most difficult issues in the case because of the decision in Lumberman’s Mutual Casualty Company v Bovis Lease Lend Limited. That case arose out of a building contract for the construction of the Braehead Shopping Centre in Glasgow. The contractors’ claim for £37m and the owners’ counter-claim for £103m were eventually settled by the payment of £15m to the contractor, Bovis. The settlement agreement did not indicate how the £15m had been calculated and made no reference to which part of the contractor’s or the owner’s claims had been regarded as valid. Following settlement the contractor, Bovis, sought to recover some £19m under its insurance policies. The court held that it was an implied term of a contract of indemnity that the insured’s loss had been specifically ascertained by means of a judgment, arbitration award or settlement agreement. As a matter of law, an insured who relied on a settlement as a means of ascertainment had to prove that he was in truth under a liability insured by the policy and that what he paid by way of settlement of that liability was reasonable. Crucially, the court held that a settlement agreement which did not identify the loss suffered specifically by reference to the insured liability did not amount to a valid ascertainment. In hearing the present case Mr Justice Aikens was unimpressed by the decision in Lumberman’s. In his view, if Enterprise Oil had otherwise proved its loss, it would have been able to recover that loss under the indemnity, irrespective of the fact that the settlement agreement had not specifically identified the amounts being made against each separate head of claim. On the facts of this case, however, this point did not arise. Enterprise was covered under its insurance policy for loss resulting from actual liability to third parties, not arguable liability. It was plain on the evidence that the Texas court would not have found Enterprise liable in the manner claimed by Rowan. That being the case, the amount of the settlement which Enterprise had been a party to was not reasonable in respect of the claims to which it was legally exposed. Accordingly Enterprise was not entitled to recover the sums it had paid out by way of indemnity under its insurance policy.
CJ-0622
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