The English Court of Appeal handed down judgment on a consequential loss clause – according to law firm Ince & Co. which represented Transocean, the decision could have far-reaching implications for the energy industry and commercial parties generally.
In December 2014, Transocean appealed against the original decision of the English Commercial Court concerning the potential liability of contractors for operators’ costs.
Two years earlier, Transocean had initiated a claim against Providence in relation to unpaid invoices for hire and reimbursables. Providence counter-claimed for its “spread costs” - mainly equipment and third-party contractor expenses-incurred during a period of downtime, alleging that these were caused by the downtime event for which Transocean was responsible.
The Commercial Court judge ruled that “spread costs” fell outside the ambit of the consequential loss clause, with the result that Providence was successful in its claim to set-off these costs from the amount that would otherwise have been due to Transocean.
However, the Court of Appeal found that the judge had erred in the construction of the consequential loss clause and in emphasizing the ability of sophisticated commercial parties to freely enter into contracts that limit or exclude liability in the event of breach.
Jeremy Farr, partner and Global Head of Energy who led the Ince & Co. team advising Transocean, said: “In the current market conditions many operators have been looking for ways to renegotiate or avoid payment of sums to contractors that in better times would have been paid without issue.
“Since the Commercial Court decision a number of operators have made claims for spread costs or similar from contractors. The industry had generally considered spread costs to be excluded by many of the standard consequential loss clauses in use. This Court of Appeal decision will cause those claims from operators to be looked at in a new light, although each dispute will turn on the specific wording of the relevant clause.”
Providence estimates the financial implications of the Court of Appeal’s judgment will result in the payment of around $7 million (excluding interest and costs) to Transocean. The parties and their legal advisors are in the process of agreeing the final amount payable to Transocean and the terms of payment.
In the meantime, Providence is in discussions with its financial advisors and current debt provider to ensure it has the resources to satisfy its obligations to Transocean.
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