Ince & Co has announced today that it represented Transocean Drilling UK Limited (“Transocean”) in its successful appeal against Providence Resources Plc (“Providence”).

The English Court of Appeal today handed down judgment on the construction of a consequential loss clause in a drilling contract between Transocean and Providence, in a decision with potentially far reaching implications for the energy industry and commercial parties generally. In doing so it has given guidance on how consequential loss clauses should be interpreted generally.

The original decision of English Commercial Court, issued in December 2014, caused concern about the potential liability of contractors for operators’ costs and was the aspect of the decision that Transocean appealed.

In late 2012, Transocean commenced a claim against Providence in relation to unpaid invoices for hire and reimbursables. Providence counter claimed for its ‘spread costs’, largely equipment and third party contractor costs, that were incurred during a period of downtime, alleging that those costs were wasted and caused by the downtime event for which Transocean was responsible.

At first instance the Commercial Court judge found that spread costs fell outside the ambit of the consequential loss clause, holding they did not amount to “loss of use” within the meaning of that clause, and Providence were therefore successful in their claim to set-off their spread costs from the amount that would otherwise have been due to Transocean.

The Court of Appeal has today allowed Transocean’s appeal, finding that the Judge at first instance had erred in the construction of the consequential loss clause and emphasising 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) led the Ince & Co team advising Transocean. His team comprised Clare Kempkens (partner) and Shawn Kirby (senior associate). They instructed Laurence Rabinowitz Q.C. of One Essex Street and Colin West of Brick Court Chambers.

Jeremy Farr, commented:

“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.”

Herbert Smith Freehills, who instructed John McCaughran Q.C. and Laurence Emmett of One Essex Street, advised Providence.