BHP Billiton Petroleum Ltd and Others v Dalmine SpA
| Jurisdiction | England & Wales |
| Judge | Lord Justice Rix |
| Judgment Date | 19 February 2003 |
| Neutral Citation | [2003] EWCA Civ 170 |
| Docket Number | Case No: A3/2002/1338 |
| Court | Court of Appeal (Civil Division) |
| Date | 19 February 2003 |
[2003] EWCA Civ 170
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Mr Justice Cresswell
Royal Courts of Justice
Strand,
London, WC2A 2LL
Lord Justice Aldous
Lord Justice Kay and
Lord Justice Rix
Case No: A3/2002/1338
Mr Mark Howard QC & Mr Alec Haydon (instructed by Messrs Herbert Smith) and Miss Alexandra Truesdale of Herbert Smith, for the Respondents
Mr Christopher Hancock QC & Mr Philip Edey (instructed by Messrs Linklaters) for the Appellant
This is the judgment of the court.
The appellant, Dalmine SpA, is an Italian steel-maker which manufactured and provided the 12" diameter steel pipes used in the construction of a sub-sea gas reinjection pipeline serving the Lennox and Douglas oil and gas fields in the Liverpool Bay area of the Irish Sea. The pipeline ran between the Douglas and Lennox platforms. The respondents were at the relevant time co-venturers and participants in the Liverpool Bay Development, which embraced those fields and the pipeline. The first respondent, BHP Billiton Petroleum Limited, acted on behalf of the co-venturers as the "Operator" of the Development. We shall refer to the respondents simply as "BHP". This litigation has arisen out of the failure of the pipeline, which has had to be replaced.
The pipeline was laid between 30 April and 27 June 1994 but did not enter service until April 1996.The discovery of a problem occurred on 7 June 1996, when gas bubbles were noticed on the surface of the sea. Investigations ensued, and by 22 June 1996 leaks had been identified at six failure sites, referred to as Leak Sites A-F, within a portion of the pipeline known as the "Failure Zone". The distance between sites A-F was 1.15 kms. The Failure Zone comprised 144 pipes, each of 12 metres. The total length of the pipeline was 31.7 kms. It was established not only that the pipeline had failed at each of the leak sites A-F, but also that it had not failed elsewhere: at one time another twelve sites came under suspicion, but in the event were cleared.
The reasons for the failure of the pipeline were investigated. It was established that cracks had developed in the roots of welds which joined the pipes together. At leak sites A-F these cracks had propagated from the weld roots into the parent metal of the adjacent pipe and had developed into through-wall cracks, linking the interior and exterior walls of the pipe. The cracks had initiated because of a combination of excessive hardness of the weld root metal and because the pipeline was subject, as was expected, to sour service conditions, ie the combination of hydrogen sulphide and water. This has the effect of releasing hydrogen atoms which permeate the crystal lattice of the steel and embrittle it. The effect is known as sulphide stress corrosion cracking or SSCC. The propagation of the cracks into the parent pipe metal was due to the fact that the force exerted by the tip of the crack (expressed as "Kapplied" or the applied stress intensity factor) exceeded the resistance of which the parent pipe steel was capable (expressed as "KIscc" or the threshold stress intensity factor). The resistance of the pipe metal in turn depended on the steel's carbon equivalent value or "CEV". For that or other reasons the specification under which the steel was manufactured stipulated a maximum CEV of 0.40%. The lower the CEV, the more resistant the steel is to crack propagation. The higher the CEV, the less resistant it is. When the CEV of the pipes adjacent to the leak sites was investigated it emerged that in the case of each of sites A-F where the through-wall cracks had occurred, at least one of the pipes either side of the weld had a CEV greater than 0.40% and was therefore in that respect out of specification ("non-compliant pipe"). The average CEV of the non-compliant pipes at the leak sites ranged from 0.419% to 0.447%.The pipeline did not fail at any welded joints where both of the pipes were compliant.
As a result of the failure of the pipeline BHP commenced this litigation against both British Steel plc and Dalmine. British Steel was the supplier to BHP of the pipes under contract and entered into a sub-contract with Dalmine for their manufacture. There were no contractual relations directly between BHP and Dalmine, but the same data sheet and specification operated under both contract and sub-contract. BHP sued British Steel in contract and Dalmine in negligence. BHP's case against British Steel in contract was abandoned after this court's decision adverse to BHP on the effect of British Steel's limitation and exception clauses: see BHP Petroleum Ltd v. British Steel plc [2000] 2 Lloyd's Rep 277. It emerged, however, in the course of discovery that Dalmine had fraudulently misrepresented the CEV of certain pipes at the inspection and certification stage of the manufacture and supply process. Pipes are manufactured in batches of fifty at a time, and these batches are known as "heats". Dalmine was required to test each heat for compliance with the data sheet and specification and to certify compliance. For these purposes two pipes out of each heat had to be tested. Pipes from six heats tested non-compliant. However, a senior member of Dalmine's quality control department deliberately changed the results and produced false inspection reports and a false certificate of compliance. Dalmine has admitted responsibility for that fraud and that BHP was entitled to and did rely on the false documents.
It is therefore common ground that in reliance on Dalmine's deceit BHP accepted and utilised the pipes by incorporating them into the pipeline in circumstances where if it had known the truth the pipes would have been rejected.
Nevertheless there remained an issue or issues of causation between the parties in relation to BHP's case in deceit which was fought out at a trial before Cresswell J in February 2002. The judge expressed the issue(s) in this way (at para 33 of his judgment, [2002] EWHC 970 (Comm), unreported 16 May 2002):
"Did the incorporation of non-compliant pipe cause the pipeline to fail (as the claimants say) or would it have failed anyway (as the defendant says)?"
The issue(s) grew out of an earlier order dated 24 November 2000, which had made directions for a trial covering the questions of reliance and causation, inter alia in the following terms:
"Was the Claimants' loss caused by their reliance on the Defendant's fraudulent misrepresentations? Did the pipeline fail for the reasons pleaded in paragraph 25 of the Re-Re-Amended Points of Claim?"
In the run-up to that trial, however, certain agreements and concessions were made. By a memorandum of agreement dated 17 January 2002 the parties agreed that the causation issue should proceed on the basis that, if no false representations had been made, only compliant pipes would have been incorporated into the pipeline. And on 5 February 2002 Dalmine conceded reliance by BHP. That left only the issue of causation.
The parties are agreed (see the memorandum of agreement) that if the remaining issue of causation is determined in BHP's favour, BHP will be entitled to judgment on liability with damages to be assessed and it will not need to pursue its action in negligence.
The judge resolved the issue of causation in BHP's favour. As a result his order provides for judgment to be entered against Dalmine on liability in deceit, with damages to be assessed.
Burden of proof
Among the questions debated before Cresswell J was an issue as to burden of proof. BHP accepted that it bore the burden of proving that the incorporation of non-compliant pipe caused the pipeline to fail, which was the first part of the issue stated by the judge, but submitted that Dalmine bore the burden of proving that the pipeline would have failed in any event, ie even if it had been made solely of compliant pipe, which was the second part of the issue stated by the judge. In the end Cresswell J did not have to determine the burden of proof issue, for he found that BHP had succeeded on both parts of the causation issue. Thus he concluded (at para 280):
"For the reasons set out above I find that on the balance of probabilities the incorporation of non-compliant pipe caused the pipeline to fail. For the reasons set out above I find on the balance of probabilities that the pipeline would not have failed anyway."
For the purposes of this appeal both parties made detailed submissions on the burden of proof issue in their skeleton arguments. At the hearing we therefore asked the parties to deal with it first. Following the overnight adjournment at the end of the first day of the appeal hearing, we indicated that we had decided that the burden of proving that a pipeline made only of compliant pipe would have failed in any event rested on Dalmine. We reserved our reasons.
Later that day Mr Christopher Hancock QC, counsel on behalf of Dalmine, informed us that Dalmine recognised that in the circumstances it could not sustain that burden. Mr Hancock explained that he did so because he accepted the judge's finding at para 213 that it was not possible to say what the CEV of untested pipes on the pipeline was. In fact the judge's finding was more complex than that, for his agnosticism was qualified ("save to say") by what he went on to state in sub-paragraphs (1) and (2) of para 2Be that as it may, the position is that Dalmine has conceded that, if the burden of proving what would have happened to a hypothetical pipeline made up...
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