Seadrill Management Services Ltd v OAO Gazprom Operator (The Ekha)

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLord Justice Moore-Bick,Lord Justice Lloyd,Lord Justice Ward
Judgment Date17 June 2010
Neutral Citation[2010] EWCA Civ 691
Docket NumberCase No: A3/2009/2111
Date17 June 2010

[2010] EWCA Civ 691

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION (COMMERCIAL COURT)

(Mr. Justice Flaux)

Before: Lord Justice Ward

Lord Justice Lloyd

and

Lord Justice Moore-bick

Case No: A3/2009/2111

[2009] EWHC 1530 (Comm)

Between
(1) Seadrill Management Services Limited
(2) Seadrill Larissa Limited
Claimants/appellants
and
Oao Gazprom
Defendant/respondent

Mr. Richard Jacobs Q.C. and Mr. Nigel Eaton (instructed by Holman Fenwick Willan LLP) for the appellants

Mr. Simon Rainey Q.C. and Mr. Nigel Cooper Q.C. (instructed by Herbert Smith LLP) for the respondent

Hearing dates: 27 th and 28th April 2010

Lord Justice Moore-Bick

Lord Justice Moore-Bick:

Background

1

This is an appeal on limited grounds against the judgment of Flaux J. following a trial at which the judge determined many issues of fact and law then outstanding between the parties. The circumstances which gave rise to the dispute are described fully in the judgment below and since the judge's findings of fact are not challenged, it is sufficient for the purposes of the appeal to describe them briefly. Anyone who wishes to gain a fuller understanding of the dispute and the judge's findings can obtain it from his judgment: [2009] EWHC 1530 (Comm), [2010] 1 Lloyd's Rep. 543.

2

The appellants, to whom I shall refer collectively as “Seadrill”, were the owners and operators of a jack-up drilling rig. The respondent (“Gazprom”) is a Russian company which specialises in exploring for and exploiting gas deposits. On 10 th September 2005 Gazprom entered into a contract with Seadrill on the terms of the International Daywork Drilling Contract-Offshore (“IDDCO”) form published by the International Association of Drilling Contractors under which Seadrill agreed to furnish the rig for the purposes of drilling an exploratory well in the Bay of Bengal. The rig is effectively a floating barge with three legs capable of being lowered onto the sea bed in order to provide the support required for drilling operations. Once in position the entire weight of the rig is borne on the legs and the body of the rig is raised above sea level for the purposes of operations.

3

The process of settling the legs in the sea bed is called “pre-loading”. Depending on the nature of the sea bed, the legs can be expected to penetrate the surface to a greater or lesser extent as the weight of the rig is transferred from the sea itself (when the rig is floating) to the sea bed. In order to ensure sufficient stability for safe operation, the legs must be driven into the soil of the seabed, first by the weight of the rig itself and then by the use of seawater ballast to provide additional weight. The operation is carried out in several stages using increasing amounts of ballast. If the operation is carried out properly the rig will come to rest on an even keel at its maximum level of penetration and will not sink further during operations. In this case the nature of the drilling location meant that the legs could be expected to penetrate the sea bed to an unusual depth, but, as the judge found, the properties of the soil were as had been predicted by earlier surveys. Most importantly, the load-bearing capacity of the soil increased in a linear fashion as the depth increased.

4

Pre-loading began on 2 nd January 2006 and was still continuing on the morning of 9 th January. Between 0200 hours and 0600 hours the stern legs (port and starboard) penetrated the sub-sea soil significantly with uneven and excessive trim to the stern. As a consequence, the legs became jammed and could not be moved up or down. Over the following two days the crew carried out a number of recovery operations which resulted in damage to the rig, her legs and jacking systems. She was subsequently towed to a shipyard in Singapore for repairs.

5

Gazprom considered that the casualty had been caused by negligence on the part of the master and crew in carrying out the pre-loading operation and on 16 th May 2006 it wrote to Seadrill terminating the contract for repudiation. Seadrill rejected the suggestion that it had repudiated the contract and asserted that Gazprom was itself in repudiation by purporting to treat the contract as discharged. At that stage Gazprom had not paid any hire under the contract and it continued to withhold payment thereafter. On 10 th July 2006, Seadrill wrote to Gazprom terminating the contract for repudiation and purporting to exercise its right to terminate the contract for non-payment of hire. Gazprom eventually drilled the well using a semi-submersible unit provided by another contractor and after completion of repairs the rig went into service with another operator.

6

In August 2007 Seadrill started proceedings against Gazprom seeking to recover hire for the period from November 2005 to July 2006, together with certain uninsured losses which it said it was entitled to recover under the contract. Gazprom accepts that, subject to its counterclaim for damages, hire is payable from 9 th December 2005, when the rig was loaded onto the vessel carrying it to the drilling area, until the time of the incident, but says that no hire became payable before 9 th December 2005 and that it ceased to be liable for hire after the incident occurred. Gazprom's case is that Seadrill was in breach of an obligation to operate the rig with reasonable skill and care and that if any hire became due following the casualty, it is entitled to recover it as damages for breach of contract. It also claims to recover damages for other loss and damage which it says it has suffered as a result of the breach.

7

In paragraph 23 of his judgment the judge summarised twelve issues which remained for decision at the conclusion of the trial. Of those, this appeal is concerned only with a single group of issues relating to the construction of the contract. It is convenient, therefore, to say a little more about the contract and the judge's findings at this stage.

The contract

8

The IDDCO form deals with various aspects of the relationship between the parties in a series of Articles, each of which is broken down into paragraphs. The version used by the parties was the 1989 edition, at least one previous version having been published in 1974. Within Article V paragraphs 501 to 510 contain various provisions relating to the contractor's performance of operations. Two of these, 501 and 502 are of particular importance. They provide as follows:

501. Contractor's Standard of Performance

Contractor shall carry out all operations hereunder on a daywork basis. For purposes hereof the term “daywork basis” means Contractor shall furnish equipment, labor, and perform services as herein provided, for a specified sum per day under the direction and supervision of Operator … When operating on a daywork basis, Contractor shall be fully paid at the applicable rates of payment and assumes only the obligations and liabilities stated herein. Except for such obligations and liabilities specifically assumed by Contractor, Operator shall be solely responsible and assumes liability for all consequences of operations by both parties while on a daywork basis, including results and all other risks or liabilities incurred in or incident to such operations, notwithstanding any breach of representation or warranty, either expressed or implied, or the negligence or fault of Contractor, its employees, agents or servants, including sole, concurrent or gross negligence, either active or passive, latent defects or unseaworthiness of vessels (whether or not pre-existing) and any liability based on any theory of tort, breach of contract or strict liability, including defect or ruin of premises, either latent or patent.

502. Operation of Drilling Unit

Subject to Paragraph 606, Contractor shall be responsible for the operation of the Drilling Unit …”

9

Article IX contains various provisions which allocate responsibility for loss and damage to one or other party, generally using for that purpose the expression “be responsible for and hold harmless and indemnify [the other] against”, or very similar words. Paragraph 910(a) explains what that means in the following terms:

910. Indemnity Obligation

(a) The parties intend and agree that the phrase “be responsible for and hold harmless and indemnify” in Paragraphs 606, 608 and 901 through 909 hereof mean that the indemnifying party shall release, indemnify, hold harmless and defend (including payment of reasonable attorney's fees and costs of litigation) the indemnified party from and against any and all claims, demands, causes of action, damages, judgements and awards of any kind or character, without limit and without regard to the cause or causes thereof, including pre-existing conditions, whether such conditions be patent or latent, the unseaworthiness of any vessel or vessels, breach of representation or warranty (express or implied), strict liability, tort, breach of contract, or the negligence of any person or persons, including that of the indemnified party, whether such negligence be sole, joint or concurrent, active, passive or gross, or any other theory of legal liability.”

10

Paragraph 911 provides as follows:

911.General Intent

The parties recognise that the performance of well drilling, workover, and associated activities such as those to be performed under this Contract have resulted in bodily injury, death, damage or loss of property, well loss or damage, pollution, loss of well control, reservoir damage and other losses and liabilities. It is the intention of the parties hereto...

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1 firm's commentaries
  • Case Law Update 2011 - Issue 1
    • United Kingdom
    • Mondaq United Kingdom
    • 25 Enero 2011
    ...CONSTRUCTION AND ENGINEERING CONTRACT DISPUTES LAW Breach of Contract Under IDDCO Form Seadrill Management Services Ltd v OAO Gazprom [2010] 131 Con LR 9 This is the CA appeal against the first instance decision reported in 126 Con LR. Under an International Day Work Drilling Contract Off-s......
1 books & journal articles
  • INTERIM ENFORCEMENT OF AN ADJUDICATION DECISION
    • Singapore
    • Singapore Academy of Law Journal Nbr. 2016, December 2016
    • 1 Diciembre 2016
    ...4 SLR 364 at [166]—[175]. 44PT Perusahaan Gas Negara (Persero) TBK v CRW Joint Operation[2015] 4 SLR 364 at [67]–[69] and [77]–[82]. 45[2010] EWCA Civ 691. 46Seadrill Management Services Ltd v OAO Gazprom[2010] EWCA Civ 691 at [17]. 47[2007] UKHL 40. This decision was approvingly cited by S......

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