FIRST DIVISION, INNER HOUSE, COURT OF SESSION

Lord PresidentLord SutherlandLord CoulsfieldLord Gill

0/1261/5/1990

OPINION OF THE LORD PRESIDENT

in

RECLAIMING MOTIONS

in the causes

CALEDONIA NORTH SEA LIMITEDPursuers and Reclaimers;

against

1. LONDON BRIDGE ENGINEERING LIMITED;

2. PICKUP NO. 7 LIMITED (formerly NORTHERN INDUSTRIAL & MARINE SERVICES COMPANY LIMITED);

3. BRITISH TELECOMMUNICATIONS plc;

4. WOOD GROUP ENGINEERING CONTRACTORS LIMITED;

5. NORTON (NO. 2) LIMITED (In liquidation)(formerly EASTMAN CHRISTENSEN LIMITED) and DAVID JOHN PALLEN, Chartered Accountant, the Liquidator thereof;

6. KELVIN INTERNATIONAL SERVICES LIMITED (formerly KELVIN CATERING LIMITED); and

7. COFLEXIP STENA OFFSHORE LIMITED (formerly STENA OFFSHORE LIMITED)

Defenders and Respondents:

_______Act: MacAulay, Q.C., Batchelor, Q.C., Hofford; Paull & Williamsons

Alt: Currie, Q.C., Keen, Q.C., Wolffe; Simpson & Marwick, W.S.

17 December 1999

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We have before us reclaiming motions in seven test actions arising out of the

explosion on the Piper Alpha platform on 6 July 1988. There are in fact 146 such

actions before the court and in all of them the pursuers are Caledonia North Sea Limited

who are the successors of the owners of the platform at the time of the disaster. The

precise position as to the responsibilities at that time is somewhat complex but, since it

has no relevance to the issues in this reclaiming motion, for convenience, I shall simply

refer to “the pursuers” without distinguishing among the entities involved. The

defenders in the actions are contractors who had employees working on the platform at

the time of the disaster. As the instances in the actions show, all but one of them have

undergone changes of name over the intervening years. For the sake of simplicity, I

refer to them by the names which they had at the time of the disaster. Employees of the

contractors were injured and killed in the disaster and the pursuers paid damages either

to the victims or to their relatives (“the claimants”). Each of the contractors was

engaged to work on the platform in terms of a contract between it and the pursuers; all

the contracts contained indemnity clauses in favour of the pursuers. In the present

actions, which are founded on those clauses, the pursuers are seeking to be indemnified

by the respective contractors for the sums that were paid in damages to the claimants.

A proof before answer was allowed and the hearing lasted a total of 391 days

spread over the period from 3 March 1993 until 31 October 1996. The Lord Ordinary

issued his opinion on 2 September 1997 and, though not reported, it is being published

on the Internet, under the name Elf Caledonia Limited v. London Bridge Engineering

Limited and Others. In the result the Lord Ordinary was satisfied that the pursuers had

established that the explosion had been caused by a leak of condensate from a blind

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flange which had been placed on pipework where a pressure safety valve (PSV 504) had

been removed for routine maintenance and had not been replaced. He was satisfied also

that the flange had not been fitted properly by an employee of Score (U.K.) Ltd., a

contractor which had been employed to inspect and maintain valves on the platform.

That being so, in the Lord Ordinary’s view the pursuers had established the factual basis

upon which they would have been entitled to recover under the indemnities.

In fact, however, except in a few cases, all the damages had been paid to the

claimants not by the pursuers themselves but by their insurers acting under contracts of

insurance covering the risk in question. Though brought in the name of the company,

the present actions were actually raised on behalf of the insurers in order to recover from

the contractors the sums which they had spent in indemnifying the pursuers against the

claims brought against them. In the exceptional cases, of which the action against Stena

Offshore Ltd. is an example, the pursuers had not had full insurance to cover the claims

brought against them and they themselves had therefore paid the uninsured element of

the claims. The gap in the insurance cover of the pursuers came to be known as the

“Oxy Gap” and the cases where this point arises were referred to as “the Oxy Gap

cases”.

At almost the very end of the proof the defenders advanced an argument that all

the test cases, except the case involving Stena Offshore Ltd., were irrelevant. I deal with

this argument in Part 1 of the opinion but, put shortly, it was to the effect that the

pursuers had been indemnified by the insurers and therefore were not entitled to be

indemnified again under the indemnity clauses in the contracts with the defenders. Since

the pursuers could not recover in an action based on the indemnity clauses, the insurers

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could not do so either: there was no surviving right of action to which they could be

subrogated. The insurers’ only possible remedy would have been by an action of relief

brought in their own name against the various contractors. The same argument applied

to the Oxy Gap cases in so far as the pursuers sought to recover any sums paid out by the

insurers.

In the event the Lord Ordinary gave effect to the defenders’ argument on

relevancy. In the Oxy Gap case against Stena Offshore Ltd. he granted decree only for

the amounts which represented the sums paid by the pursuers themselves abated to the

Scottish level of damages. In all the other six cases the Lord Ordinary assoilzied the

defenders. The pursuers reclaimed on the relevancy point and also on the Lord

Ordinary’s decision that he would in any event have restricted the sum to be recovered

under the indemnities to an amount which would have represented the value of the

claims under Scots law. The pursuers had sought indemnity for the larger sums which

they had actually paid to settle the claims because of advice which they had been given

that the claimants might have been able to establish jurisdiction against them in Texas.

The pursuers also reclaimed on an issue arising out of their tax liability. The defenders

cross-appealed on various issues, but principally challenged the Lord Ordinary’s

interpretation of the indemnities and his view that the pursuers had established the

necessary factual basis to succeed in the actions based on the indemnities.

The first volume of the Lord Ordinary’s opinion contains a very detailed account

of the basic facts which form the background to the actions. By a joint minute the

parties have agreed that, with some minor corrections and excisions, the Lord Ordinary’s

account is accurate. We have arranged for that amended version to be reproduced as an

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appendix to our opinions and, with due gratitude to the Lord Ordinary, I refer to that

appendix for an account of those matters.

The opinion of Lord Coulsfield contains not only an account of many of the

relevant background facts but also an extensive narrative of the various arguments which

were presented by counsel in the hearing before this court. He has also set out the terms

of the various contracts which are the basis of the actions. That immense labour relieves

me of any need to recite the arguments or to reproduce all the terms of the contracts.

In this opinion I deal, first, in Part 1 with the pursuers’ reclaiming motions on the

point of relevancy (“The Contribution Point”) on which the Lord Ordinary ruled against

the pursuers. After that, in Part 2 I turn to the cross-appeals on the “Construction of the

Indemnities”, followed in Part 3 by the pursuers’ reclaiming motions on “Consequential

Loss”, relating to the Lord Ordinary’s decision to restrict the sum which could be

recovered under the indemnities. Further arguments on whether the pursuers can recover

for anything other than Scottish damages appear in the defenders’ cross-appeals on “The

Scottish Level of Damages” in Part 4 and on the “Governing Law” in Part 5. After that I

come on to “The Tax Issue” in Part 6 and to a question relating to “Interest” paid to the

pursuers by the Inland Revenue in Part 7. Having had the privilege of considering the

opinions of the other members of the court on the factual issues, I agree with their

conclusions. In Part 8 (“The Lord Ordinary’s Decision on the Facts”) I therefore

comment only on a number of specific issues. In Part 9 (“Novus Actus Interveniens”) I

deal with a legal argument arising out of the Lord Ordinary’s decision that the explosion

was caused by a combination of, first, negligence by the late Mr. Terence Sutton in

fitting the blind flange to the pipework and, secondly, the subsequent act of the late Mr.

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Robert Vernon who negligently pressurised pump A and so introduced condensate under

pressure into that section of pipework. Finally, in Part 10 (“Summary and Disposal”) I

summarise the conclusions which I have reached and the matters to be considered at the

By Order hearing which counsel asked us to hold before we formulated our interlocutors.

I start with the defenders’ argument on relevancy for which I adopt the title used

at the hearing and in the papers, even though it does not really do justice to the range of

contentions advanced by counsel.

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1. THE CONTRIBUTION POINT

Although the present litigations were raised and have been fought in the name of

the pursuers, counsel for the pursuers accept that their insurers are in fact using the

pursuers’ name by virtue of subrogation. In other words, having indemnified the

pursuers, the insurers are standing in their shoes and are using their name to bring

proceedings to enforce the obligations contained in the indemnity clauses in the various

contracts between the pursuers and the defenders. Counsel for the defenders took no

point about this until Day 381 of the proof, the very last day of the main body of their

submissions in the Outer House, when they launched on the unsuspecting pursuers an

entirely novel argument to the effect that the pursuers’ case, in all but the Stena Offshore

action, was entirely irrelevant and, in the Stena Offshore action where the pursuers

themselves had paid a relatively small portion of the claims brought against them, was

relevant only in respect of that portion. In due course the Lord Ordinary gave

devastating effect to this argument by granting decree for only the small portion of the

pursuers’ claim in the Stena Offshore action and assoilzieing the defenders in all the

other actions. The pursuers reclaimed against this decision and we heard exceedingly

full submissions on the point. A detailed account of the argument for both parties is to

be found in Part 4(a) of Lord Coulsfield’s opinion.

The starting point of the defenders’ argument is that a contract of insurance is a

contract of indemnity. Although the details of the insurance arrangements of the

pursuers were complex, there is no doubt whatever that, subject to the “Oxy Gap”, they

had contracts of insurance with insurance companies which covered their losses from

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having to pay damages to the claimants. The exact nature of those insurance

arrangements (for example, whether different insurers covered different levels of loss)

was not explored before the Lord Ordinary or before this court. The argument

proceeded essentially on the basis that we should treat the pursuers as having a single

contract of insurance with their insurers which covered the losses in question. It is

common ground that the contracts of insurance are contracts of indemnity. After the

disaster occurred, the pursuers contacted the insurers who were subsequently involved in

the negotiations leading to the claims of the relatives and the injured men being settled.

What actually happened, as I explain more fully in Part 4 below, was that, in the usual

way, the insurers took the lead and, when the claims were eventually settled, the

payments to the claimants were made by cheques drawn on the account of the insurers,

rather than of the pursuers. It follows that, except in the Oxy Gap cases, the pursuers

themselves did not actually pay out any money to the claimants.

If one turns to the relationship between the pursuers and the defenders, the basic

position is again not in dispute. At the relevant time the pursuers were in contractual

relations with the defenders and in the contracts were clauses of indemnity which,

leaving aside the various qualifications in those clauses, made the defenders liable to

indemnify the pursuers against claims or losses arising out of the death of, or injury to,

the defenders’ employees. Indeed, as I have explained, all the actions which form the

subject of these proceedings are based on those indemnity clauses.

As Mr. Wolffe said, the defenders’ basic argument was simple. The pursuers had

been indemnified by their insurers. The pursuers now sought to be further indemnified

by the defenders under the various indemnity clauses in their service contracts. But,

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having been fully indemnified by their insurers, the pursuers were not entitled to seek

any further indemnity from the defenders, since this would mean that they were being

more than fully indemnified, contrary to the basic principle of the law of indemnity as

enunciated once for all in the classic exposition of Brett L.J. in Castellain v. Preston

(1883) 11 Q.B.D. 380 at p. 386. The present actions would accordingly be irrelevant if

brought by the pursuers and they must equally be irrelevant when raised by the insurers

using the pursuers’ name.

In attacking that argument Mr. Batchelor, Q.C., advanced an equally simple point

of view on behalf of the pursuers. He did not call into question the principle that an

assured is not entitled to be more than fully indemnified. But, he said, payments made

by insurers to indemnify an assured were res inter alios acta so far as any third party was

concerned. That was a general principle which applied in any case where an insurer

raised proceedings in the name of the assured. It therefore applied in the present cases

where the proceedings were based on a right under a contract of indemnity. The actions

were accordingly relevant. Although counsel placed both the “simple” argument for the

defenders and the pursuers’ attack on it in a wider context relating to the law on

contribution and relief, I find it convenient to deal with the “simple” argument first.

1.1 Lack of Specific Notice in the Defenders’ Pleadings

Before turning to the defenders’ “simple” argument, however, I should record

that counsel for the pursuers submitted that the Lord Ordinary had been wrong to deal

with the defenders’ argument at all since it was not focused in a specific plea-in-law nor

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otherwise foreshadowed in the defenders’ pleadings. Had it been, the pursuers might

well have wished to debate the point in procedure roll since, if correct, it was a complete

answer to most of the actions and proof in those actions had therefore been unnecessary.

It is fair to say that counsel for the pursuers did not advance the argument unduly

strenuously and by the time senior counsel came to address us it had been reduced to the

status of “a grumble”.

It may well be that it would have been preferable for the defenders to focus their

argument in a specific plea-in-law. It may well be also that it would have been

preferable if the point had been debated in procedure roll. But we do not know when

exactly the particular argument occurred to counsel for the defenders - it may, for

instance, have come to mind only during the proof and even at a late stage in the proof.

The reasons for the lack of a specific plea or for the defenders’ not having taken the

point in procedure roll would obviously be factors in any question of expenses.

What the Lord Ordinary had to decide, however, was whether it was open to the

defenders to take this fundamental point under their general plea to the relevancy of the

pursuers’ case. He decided that it was and I agree with him: the defenders’ argument

is indeed directed to the relevancy of the pursuers’ case as a whole and can therefore be

dealt with under such a general plea. Moreover, if an argument can properly be

advanced under a general plea to the relevancy, then it can properly be advanced on that

basis even if it occurred to counsel only at a very late stage in the proceedings, long after

the plea itself was tabled. That having been said, it could have been that the pursuers

were prejudiced by the lack of notice of the particular argument - if, for instance, they

might have wished to lead evidence to counter some aspect of the argument. But in this

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case counsel for the pursuers made no motion to the Lord Ordinary to be allowed to lead

additional evidence and, before us, they confirmed that they would not have wished to

do so. They were also given time to prepare their reply to the defenders’ argument. In

that situation I can detect no real prejudice which the pursuers suffered in the conduct of

these proceedings from the sudden appearance of the defenders’ fundamental argument.

If the Lord Ordinary had rejected the defenders’ argument, its sudden emergence would

have made no difference. Since the pursuers were given time to prepare their response

and did not wish to lead further evidence, they would apparently have fared no better,

and the Lord Ordinary would still have accepted the defenders’ argument, even if it had

been signalled from the outset. As the mounds of authorities assembled for the

reclaiming motion proclaimed, the once-novel point has certainly been fully researched

by now. In those circumstances I am satisfied not only that the Lord Ordinary was

correct to consider the defenders’ argument but that it is proper for us to do so too.

1.2 Subrogation to Rights under an Indemnity - The Defenders’ “Simple”

Argument

In presenting their argument that the payment by the insurers had the effect of

extinguishing the contractors’ liability under the indemnity clauses, counsel for the

defenders accepted, of course, that payments by an insurer are not generally regarded as

having the effect of extinguishing a third party’s liability to the assured. To take only

the most obvious example, it has long been settled that a wrongdoer’s liability to pay

damages is not affected by the fact that the victim may have been indemnified for his

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loss under a contract of insurance. See, for instance, Bradburn v. Great Western

Railway (1874) L.R. 10 Ex. 1. Counsel argued, however, that a clause or contract of

indemnity was different. Under such a contract the person to be indemnified is entitled

to be indemnified for his loss but is entitled to nothing more. Therefore, it was said, in a

case where the person seeking to be indemnified had already been indemnified by his

insurers, he no longer had any loss for which he could be indemnified under the contract

or clause of indemnity.

I do not find the supposed distinction compelling. In a case where an owner’s

property is damaged by the wrongful act of a third party, the third party’s liability is to

pay damages which will compensate the owner for the loss which he has suffered as a

result of the third party’s act. The liability arises only where there is loss. In a particular

case, of course, the owner may have been insured and so may receive a full indemnity

from his insurers. In those circumstances he will no longer be suffering any actual loss

as a result of the damage to his property. Nevertheless, as between the owner and the

third party, he is regarded as still suffering a loss, at least for the purpose of allowing

proceedings to be brought in his name to recover that loss from the third party. Were the

law not to treat him as continuing to suffer a loss for these purposes, there would be no

loss for which the third party would remain liable to compensate him; he would have no

remaining right to damages from the third party and so there would be no right which the

insurers could enforce by raising proceedings in his name. In other words subrogation

could not operate. Indeed precisely such an argument, that there could be no subrogation

because the claim had already been extinguished, was long ago advanced before, and

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rejected by, the Privy Council in an appeal from Lower Canada, Quebec Fire Insurance

v. St. Louis (1851) 7 Moo. P.C. 286.

So, it is critical to the entire approach of the law to many routine claims for

damages which are brought before our courts that the pursuer is regarded as continuing

to suffer loss even though he has been indemnified for his loss by his insurer. In all

these cases any payment by the insurer to the assured - indeed the very existence of a

contract of insurance - is said to be res inter alios acta. For that reason, when

considering whether an assured’s right to be indemnified is to be treated as remaining in

existence, even after the assured has been indemnified by his insurer, I do not find the

answer simply in the fact that the indemnifier’s obligation is to indemnify for loss.

Equally, a wrongdoer’s liability is to compensate for loss. In both cases, the question is

whether, as between the assured and the third party, the law regards the assured as

continuing to suffer loss even though he has been indemnified by his insurer. We know

that in the case of a wrongdoer the law does indeed treat the assured as continuing to

suffer loss in those circumstances and so allows an action to be brought in his name. For

my part I can see no real distinction, for present purposes, between that kind of case and

the case of an indemnity clause or contract; nor do I perceive any reason in principle

why the approach of the law should be different in the two cases.

What counsel for the defenders were really arguing was that the question should

be decided by focusing on the contract or clause of indemnity and its characteristics. In

my view that is to look at the matter from the wrong end. Subrogation is a remedy

which is available to the insurer under the contract of insurance and its purpose is to give

effect to that contract as one of indemnity. As will be seen in more detail in Part 1.4

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below, subrogation works by giving the insurer who indemnifies the assured the right to

raise proceedings in his name and, by the very nature of the circumstances in which it

comes into play, the proceedings by the insurer must necessarily be to recover sums

which have already been paid to the assured or paid on behalf of the assured. The

remedy could not exist unless, in insurance as in other cases of indemnity, our law took

the view that payments made by the indemnifier fall to be ignored in proceedings raised

by him in the name of the assured against a third party. Those payments are ignored in

all cases where subrogation applies, whatever may be the basis of the action which is

raised in the name of the assured after he has been indemnified by the insurer.

Examples make this clear. Payments by an insurer are ignored where grain

stored in a granary is insured by the owner and, the grain having been destroyed in a fire,

the owner is indemnified by the insurer. Even though the owner is no longer suffering

any loss, the insurer is entitled to stand in his place and sue the wharfinger for breach of

duty, “whether it is a breach of duty, or of custom, which is a local law, or whether it is a

duty imposed by the general law, or a duty imposed by the contract of carefully keeping

the goods”: North British and Mercantile Insurance Company v. London, Liverpool, and

Globe Insurance Company (1877) 5 Ch. D. 569 at p. 576 per Jessel M.R.; at pp. 581 -

582 per James L.J.; at pp. 584 - 585 per Mellish L.J.; at p. 587 per Baggallay J.A. The

court rejected the argument that a distinction should be drawn between such a case and

one where the third party’s liability is based on tort. Similarly, where a cargo owner’s

cargo is sacrificed to avoid a common peril and he is indemnified by his insurer for loss,

the payments to the owner are ignored and the insurer is subrogated to the owner’s claim

for general average to recover the sum which he paid to the owner: Dickenson v.

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Jardine (1868) L.R. 3 C.P. 639. Equally, where a house is destroyed by fire, the insurer

who has indemnified the owner can recover the amount of the indemnity by raising

proceedings in the name of the owner against the tenant on a covenant to repair, there

being no question of fault on the part of the tenant. Again, the fact that the owner has

been paid is ignored: Darrell v. Tibbitts (1880) 5 Q.B.D. 560 at p. 563, per Brett L.J.;

at p. 564, per Cotton L.J.; at pp. 566 - 567 per Thesiger L.J.: Andrews v. The Patriotic

Assurance Company of Ireland (1886) 18 L.R. Ir. 355 at p. 365 per Palles C.B.

In all these cases the law has chosen to disregard the payments made by the

insurer to the assured and to permit the insurer to raise an action in the assured’s name.

This is not a standpoint which is compelled by legal logic alone: if nothing but legal

logic had been in play, the law could equally well have taken the opposite view. It could

have regarded the payments made by the insurer as having the effect of indemnifying the

assured and so as extinguishing the loss. But the law has consistently taken the opposite

view and, as a matter of substance, this can only be because the policy underlying the

law of insurance is that the insurer should not bear the ultimate responsibility for

indemnifying the assured in these cases. Instead, the third party who is under an

enforceable legal obligation to pay the assured is made to bear the ultimate

responsibility. In North British and Mercantile Insurance the liability of the wharfingers

to the merchants was described as “the primary liability” as opposed to the liability of

the insurance company to indemnify the merchants by virtue of their contract of

insurance: 5 Ch. D. at p. 587 per Baggallay J.A.; cf. at p. 578 per Sir George Jessel

M.R. and at p. 582 per James L.J. This distinction has been followed in subsequent

cases, for example, by Lord Low in Sickness and Accident Assurance Association Ltd. v.

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General Accident Assurance Corporation Ltd. (1892) 19 R. 977 at p. 980 where he

referred to the decision of the House of Lords in Simpson & Co. v. Thomson (1877) 5 R.

(H.L.) 40 as exemplifying

“the doctrine that where the insured has a primary right against third

parties who have been the authors of the loss, the insurers on making

good the loss are entitled to be put in his place, and to enforce the

remedies which he would have had against these third parties.”

On the basis of the authorities the doctrine could perhaps be stated in a more general

form to the effect that where the assured has a primary right against a third party which

goes to reduce his loss, whether the right be based on a delict or on a contract, an insurer

on making good the loss is entitled to be put in his place and to enforce the remedies

which he would have had against the third party.

Counsel for the defenders sought to distinguish the present cases from other cases

involving a liability on a third party by pointing out that they involve two sets of

companies, the insurers and the contractors, both of which undertook, for a

consideration, to indemnify the pursuers in the events which occurred. Counsel

suggested that, since both had undertaken the obligation to indemnify as a commercial

transaction, there was no obvious reason why the contractors rather than the insurers

should bear the ultimate liability to indemnify the pursuers. The answer to counsel’s

suggestion must be that the pursuers are regarded as having a primary right against the

contractors and a secondary right against the insurers. The primary right derived from

the agreement under which the contractor in question carried out its role on the platform.

The contractor’s indemnity was just one element in the complex of relationships which

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were put in place to allow the platform to be operated. The insurers were not a part of

that complex of relationships but were external to it, owing an obligation to the pursuers

by reason of a contract which was concerned only with insuring the pursuers against

losses suffered by them as a result of the operation of the platform. More particularly, in

the absence of any indication to the contrary, it can be assumed that the pursuers took out

and paid for the policy of insurance, partly at least, to protect themselves against any loss

which they might suffer as a result of any failure by the contractors to fulfil their

contractual obligations to indemnify the pursuers against the claims and losses specified

in the respective indemnities. The insurance policy was intended to benefit the pursuers.

If the defenders’ argument were correct, by paying for the insurance policy, the pursuers

would have benefited not themselves but the defenders, who would be relieved pro tanto

of their contractual obligation to indemnify the pursuers against the relevant claims and

losses. That is inconsistent with the nature of a contract of insurance. The perception

that a contract of insurance is intended to benefit the assured rather than a third party,

expounded long ago by Bramwell B. in Bradburn v. Great Western Railway Co., applies

as much in the present situation as in any other.

I therefore see no reason in principle why the law should adopt a different

approach and exclude the possibility of a subrogated action in the case of a clause of

indemnity. Such a clause of indemnity, however absolute its terms, is just an

undertaking by the indemnifier to pay to the creditor the amount of the loss which he has

suffered. In essence that obligation is no different from the absolute obligation of the

wharfinger to make good the loss suffered by the owner of grain stored in his warehouse

and destroyed by fire (North British and Mercantile Insurance); or the obligation of a

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tenant under a lease to repair the landlord’s house if it is destroyed by fire (Darrell v.

Tibbitts). In these cases the insurers can raise subrogated proceedings against the

wharfinger or tenant and recover the loss, even though the owner has been indemnified.

If the law does not impose the ultimate liability to indemnify on the insurers in these

cases, there can be no reason of legal policy to make the insurers bear the ultimate

liability in a case like the present. They should therefore be entitled to raise proceedings

in the pursuers’ name based on the indemnity clauses.

I have reached that view by looking at the issue in the broad context of the law of

insurance and subrogation. What is perhaps most surprising about the defenders’

argument is the paucity of authority specifically dealing with it. At the same time, there

is nothing in the general authorities on subrogation which would suggest that contracts of

indemnity fall into a distinct category, subject to an entirely different rule. On the

contrary, the law on the availability of subrogation tends to be stated so broadly as to

leave little or no room for an exception of the kind envisaged by the defenders. For

instance, one of the classical descriptions of subrogation, by Brett L.J. in Castellain v.

Preston, 11 Q.B.D. at pp. 388 - 389, is in these terms:

“... as between the underwriter and the assured the underwriter is entitled

to the advantage of every right of the assured, whether such right consists

in contract, fulfilled or unfulfilled, or in remedy for tort capable of being

insisted on or already insisted on, or in any other right, whether by way of

condition or otherwise, legal or equitable, which can be, or has been

exercised or has accrued, and whether such right could or could not be

enforced by the insurer in the name of the assured, by the exercise or

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acquiring of which right or condition the loss against which the assured is

insured, can be, or has been diminished.”

It is hard to see how Brett L.J. could have stated the principle in broader terms and

equally hard to imagine that he did not intend it to be comprehensive. Certainly, I find it

impossible to say that he intended to exclude the right of an assured who is the creditor

under an indemnity clause or contract, since such a right is undoubtedly one “by the

exercise of ... which” any relevant loss of the assured “can be ... diminished.” This

passage from Brett L.J.’s opinion was quoted with approval by Lord Jauncey in the

House of Lords in Esso Petroleum Co. Ltd. v. Hall Russell & Co. Ltd. 1988 S.L.T. 874

at p. 882 D – F; [1989] A.C. 643 at pp. 671 H – 672 C.

Although they combed the British law reports, counsel were unable to turn up

any case dealing squarely with the right of insurers to sue in the name of their assured on

the basis of an obligation of indemnity. The lack of any reported decision does not

persuade me that such an action would be legally impossible; rather, it may tend to

suggest that the competency and relevancy of such an action, which must have been

potentially open for argument on countless occasions, have long been regarded as

established. In that connexion it is of some significance that, in Larrinaga Steamship

Co. v. The King [1945] A.C. 246 at pp. 256 and 261, Lord Wright and Lord Porter

assumed that marine risks insurers would have been subrogated to the shipowners’ rights

under the indemnity from the charterer which forms part of the employment clause in a

time charter. Counsel for the defenders pointed out, quite correctly, that their Lordships’

views were obiter. But the striking point for present purposes is, surely, that these giants

of commercial law took the point for granted. Counsel’s only other submission was that,

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however eminent the source, the views were ill-founded. It was not suggested, however,

that their Lordships’ views had been criticised by the courts or by the profession in the

intervening half-century. This is important when it is recalled that the comments of Lord

Wright and Lord Porter were directed not to an ad hoc term but to an indemnity in a

standard clause, discussed, for instance, in Scrutton on Charterparties (20th edition,

1996), pp. 366 - 368 and Carver on Carriage by Sea (13th edition, 1982), pp. 484 - 486.

I note moreover that in Whistler International Ltd. v. Kawasaki Kisen Kaisha Ltd. [1999]

3 W.L.R. 724 at pp. 739 E – 740 B Potter L.J., with whom the other members of the

Court of Appeal concurred, quoted the passage from Lord Wright’s speech without

giving any sign that he considered that it contained an anomaly.

The search by counsel for the pursuers for authority on this matter did not stop,

however, at the shores of the United Kingdom. They pursued their quest among the

many jurisdictions of the United States and there they were rewarded with a number of

discoveries. In total they cited seven cases. Rather than examine them all, I select two

which counsel for the defenders accepted were directly in point.

The first is a decision of the Supreme Court of Washington, Consolidated

Freightways, Inc. v. Moore 38 Wash. 2d 427, 229 P. 2d 882 (1951). Understanding the

facts is not made any easier by a slip in the first sentence of the judgment of Mallery J.

where the parties are transposed. Contrary to what is said there, the defendant (Moore)

leased a truck from the plaintiff (Consolidated) for a return journey from Portland to

Seattle. The lease provided that

“Lessor agrees to indemnify and save Consolidated harmless in case of

any and all injury or damage to persons or property (including damage to

21

the equipment leased hereunder or loss or damage to cargo carried

thereon) resulting from the operation of the said equipment during the

period of this lease ....”

On the return journey the defendant collided with the vehicle of a third party who

recovered a judgment for personal injuries and property damages against the plaintiff and

defendant, jointly and severally. The judgment was paid by the plaintiff with money

provided for that purpose by its insurers. In terms of an agreement with its insurers, the

plaintiff raised an action against the defendant to recover the sum which the insurers had

paid, based on the indemnity in the lease agreement. The plaintiff succeeded at first

instance and the defendant appealed. The relevant part of the Supreme Court’s decision

is in these terms (38 Wash. 2d at pp. 430 - 431; 229 P. 2d at pp. 884 - 885):

“As to his contract liability the appellant contends that the insurance

company, not respondent, paid the third party judgment; that it is the real

party in interest, is not privy to the contract of indemnity, and has no right

of subrogation by reason of its primary liability; that it should, therefore,

not be permitted to make itself whole at the expense of the appellant.

We can agree that the insurance company is not privy to the contract and

that the insurance company paid the loss. But, the ultimate question here

presented is whether or not the insurance company is subrogated to

respondent’s contractual right of indemnity.

It is a well settled rule in tort actions that a party has a cause of action

notwithstanding the payment of his loss by an insurance company.... The

22

purpose of this rule is to implement the insurance company’s right of

subrogation, and not to afford the respondent a double recovery.

‘It [subrogation] is a device adopted by equity to compel the ultimate

discharge of an obligation by him who in good conscience ought to pay

it.’ 50 Am. Jur. 678.

That insurance company recoveries, under their right of subrogation, most

often flow from tort actions is quite natural, but without significance.

Subrogation is an equitable principle and applies to contract rights as fully

as it does to tort actions.

By his contract the appellant bound himself to pay the loss. Respondent

has a contractual right to recover it from him. This cause of action is not

defeated by the insurance company’s payment of the judgment. The

insurer is subrogated to appellant’s [sic sed quaere respondent’s] contract

right of indemnity. This sustains the cause of action against appellant for

the identical reason that subrogation sustains a tort action where the

plaintiff has been paid for his loss.”

The judgment shows that the court regarded the doctrine of subrogation as a tool with

which to ensure that the proper person ultimately bears the responsibility for the cost of

indemnifying the assured. Given that general approach, the court saw no reason to

distinguish between the situation where an insurer was subrogated to an action in tort and

the situation where the insurer was subrogated to an action on a contract of indemnity.

In each case the remedy was available in order to ensure that the appropriate person bore

the ultimate liability.

23

The second case is North Central Airlines, Inc. v. The City of Aberdeen, South

Dakota 370 F. 2d 129 (8th Cir. 1966). The action arose out of an accident in which a

lady was injured in a fall in the entrance to the terminal building of Aberdeen Airport in

South Dakota. Under a lease from Aberdeen, North Central had the exclusive use of

certain parts of the building and shared use of all public space in and around the terminal

building. In terms of Article X of the lease

“The Lessee agrees to indemnify and hold the Lessor harmless from and

against all liabilities, Judgments, cost, damages and expense which may

accrue against, be charged to or recovered from Lessor by reason or on

account of ... injury to or the death of any person arising from the

Lessee’s use and occupancy of and operations at the airport under any

circumstances except when caused by the Lessor’s sole negligence or by

the joint negligence of Lessor and any person other than the Lessee.”

The injured lady sued Aberdeen for damages but lost her action. Aberdeen then sought

to recover their costs from North Central under the terms of the indemnity. The court at

first instance upheld Aberdeen’s claim for their costs and North Central appealed on

various grounds. One of their arguments was that Aberdeen were not entitled to recover

attorney fees and expenses since they had been insured for these. The Eighth Circuit of

the United States Court of Appeals rejected that argument (370 F. 2d at p. 134):

“The duty to indemnify, North Central contends, must be founded upon

the specific liability or obligation of Aberdeen and not that of its

insurance carrier. We reject North Central’s argument and hold that

Aberdeen’s insurance coverage in no way affects the underlying

24

obligation of North Central to indemnify. The fact that Aberdeen had

contracted with an insurance carrier to protect itself from the same risk of

loss as comprehended by North Central’s indemnity obligation should not

exonerate North Central from its duty to indemnify according to

agreement. Case law, we feel, squarely bears out this proposition.

In Safway Rental & Sales Co. v. Albina Engine & Machine Works, Inc.,

343 F. 2d 129 (10th Cir. 1965) the Tenth Circuit similarly faced the

question of recovery of attorney fees and other litigation expenses

incurred by an insurer of the indemnitee (the Albina Company). The

indemnitor, Safway, argued that the expenses and attorney fees were

obligations of Albina’s insurer and not of Albina itself, and that therefore

no right of subrogation to Albina’s right of indemnity against Safway

existed in behalf of the insurance company. While realizing that Albina

was only ‘technically liable’ for defending the action or paying any

judgment, the Tenth Circuit nevertheless concluded that a cause of action

under the implied indemnity agreement existed in favor of Albina and

held that Albina’s insurer was subrogated to Albina’s right to recover any

expenses incurred in defense of the suit. As to Safway’s argument that

Albina would never be individually liable for any expenses or any

judgments rendered, the court merely reiterated the proposition that:

‘the fact the insured (Albina) carried a liability policy should not relieve

the negligent party of its obligation to indemnify the insured for the

25

judgment or for fees and expenses arising from the original claim.’ 343

F. 2d at 134.”

The court went on to examine a further decision to the same effect. This case confirms

the view that the liability of the debtor under an indemnity is not affected by the fact that

the creditor may have been paid the sum in question by an insurer. (I observe in passing

that, so far as I am aware, it has never been suggested that under our law a successful

party who has insurance covering its legal expenses is for that reason debarred from

seeking those expenses against his opponent.)

Although, as counsel for the defenders pointed out, in F. H. Vahlsing, Inc., v.

Hartford Fire Ins. Co. 108 S.W. (2d) 947 (1937) the situation was slightly different,

since the insurers had taken an assignation of the assured’s rights under an indemnity, the

decision of the Court of Appeals of Texas does none the less show that, even though the

assured had been indemnified by the insurers, the assured’s rights under the indemnity

subsisted, at least to the extent of allowing them to be used by the insurers in order to

place the ultimate responsibility on the party bound by the indemnity. It therefore

supports the pursuers’ argument. Indeed only one of the American cases, Patent

Scaffolding Co. v. William Simpson Construction Company 256 Cal. App. 2d 506, 64

Cal. Rptr. 187 (1967), was against the pursuers. Counsel for the defenders recognised,

however, that it had been decided in the context of a doctrine of “equitable subrogation”

which appears to be substantially different from the legal principles applied in the

established case law in this country. In these circumstances I did not find the case of

assistance.

26

The American authorities which I have quoted provide support for the view that,

contrary to the submission of the defenders, for the purposes of subrogation an

obligation of indemnity owed by a third party is not to be treated differently from other

obligations owed by a third party. An insurer who indemnifies an assured should be

entitled to bring an action in the assured’s name to enforce an obligation of indemnity

owed by a third party to the assured, just as the insurer can bring such an action to

enforce a right to damages for breach of contract or for delict. The purpose of the

action, as with any other subrogated action brought by an insurer, is to ensure that the

third party rather than the insurer bears the ultimate liability to indemnify the assured.

The same legal policy which justifies subrogation by an insurer in the case of loss caused

by breach of contract or by delict justifies subrogation to enforce an obligation of

indemnity.

For these reasons I reject the defenders’ “simple” argument. But counsel for the

defenders supplemented that argument with a much wider submission to the effect that

the insurers’ rights, if any, against the defenders are not rights to pursue a subrogated

action in the name of the pursuers but rights to seek contribution in an action of relief.

From the terms of his opinion it appears that the Lord Ordinary was considerably

influenced by this aspect of the argument which raises certain very fundamental matters.

1.3 The Defenders’ Wider Argument

Counsel for the defenders put their argument in this way. The insurers had

entered into a contract of indemnity with the pursuers; the defenders had entered into

27

contracts with the pursuers and all those contracts contained indemnity clauses.

Although the risks covered by the insurance contract were not, of course, identical with

the events giving rise to the obligations of indemnity under the contracts for services, in

fact in each case the insurers and the defenders had contracted to indemnify the pursuers

in the events which had occurred. In that situation the law regarded the insurers and the

defenders as co-obligants, each liable in solidum to the common creditor. Where, as

here, one of the co-obligants had indemnified the common creditor, the right of the other

co-obligant was limited to a right of contribution, enforceable in an action of relief. That

right of contribution arose precisely because the payment by one co-obligant discharged

the obligation of the other: to prevent the second co-obligant being unjustly enriched in

this way, the law allowed the first co-obligant to recover one-half of the sum which he

had paid to the common creditor, so that in the end each of the co-obligants would bear a

pro rata share of the debt. It was not, therefore, anomalous that the insurers should not

be entitled to bring the present proceedings against the defenders; they could not do so

because their payment to the pursuers had discharged the defenders’ liability under the

indemnity and had thereby given the insurers a new right to sue the defenders for

contribution in an action of relief. The insurers might have lost that new right by reason

of prescription, but, if so, that was merely because they had analysed their legal position

incorrectly and had raised the wrong kind of proceedings. These last matters were

peculiar to the facts of this particular case and did not affect the position in principle.

For the pursuers Mr. Batchelor submitted that the defenders’ argument

presupposed that the payment by the defenders had indeed extinguished the defenders’

obligation to the pursuers. If, as he had argued, the payment by the insurers was truly

28

res inter alios acta and did not extinguish the defenders’ obligation under the indemnity

clauses in their contracts, then on the defenders’ own argument no obligation of

contribution could arise between the defenders and the insurers. In any event it was

wrong to regard the insurers and defenders as being co-obligants for these purposes. The

primary or ultimate obligation to indemnify rested on the defenders and any obligation

of the insurers was secondary to that obligation. Accordingly, where the insurers had

fully indemnified the pursuers, they were entitled to raise proceedings in the pursuers’

name in order to recover from the defenders the sum which they had paid to the

pursuers. In this way the primary or ultimate liability would rest on the defenders.

Since the insurers were entitled to recover the whole of their outlay and not simply a

contribution of one-half, an action of relief would have been irrelevant.

In dealing with the defenders’ “simple” argument I have held that the contractors

should bear the ultimate responsibility for indemnifying the pursuers. In the terms used

in North British and Mercantile, the contractors have “the primary liability” to

indemnify the pursuers. That being so, the insurers, who have paid on behalf of the

pursuers, should be able to recover their expenditure from the contractors. How the law

brings that about may be more a matter of machinery than of principle, but it is an

important matter, nonetheless. One possible mechanism would be by subrogation,

allowing the insurers to stand in the shoes of the pursuers and sue on the indemnity

clauses. Another possible mechanism would be by an action of relief. Counsel for both

parties assumed that these two mechanisms were necessarily mutually inconsistent. In

my view, in Scots law at least, that assumption is misconceived and tends to distort the

legal picture, thereby introducing unnecessary complications and untenable distinctions.

29

In addressing this matter I begin by looking more closely at the nature of subrogation in

Scots law.

1.4 The Nature of Subrogation in Scots Law

Although the term “subrogation” is rarely encountered nowadays except as a

legal term of art, the word itself was at one time used more generally to refer to the

substitution of one person for another (Oxford English Dictionary s.v. subrogation, 1).

In modern Scots law at least, we usually think of subrogation in relation to the position

of an insurer which has indemnified its assured, but it has long been recognised that this

is just one particular application of a concept which operates more widely. Speaking of

the situation of underwriters who had indemnified a shipowner for the loss of a vessel,

Lord Cairns L.C. observed in Simpson & Co. v. Thomson 5 R. (H.L.) at p. 42:

“I know of no foundation for the right of underwriters except the well

known principle of law that where one person has agreed to indemnify

another, he will, on making good the indemnity, be entitled to succeed to

all the ways and means by which the person indemnified might have

protected himself against or reimbursed himself for the loss.”

Similarly, in Esso Petroleum Co. Ltd. v. Hall Russell & Co. Ltd. 1988 S.L.T. at p. 882 G

– H; [1989] A.C. at p. 672 E – F Lord Jauncey noted that subrogation:

“undoubtedly extends to other contracts of indemnity and to cautionary

obligations such as guarantees given to a creditor on behalf of a debtor,

although in the former case the indemnifier is subrogated to the rights and

30

remedies of the assured or other person indemnified whereas in the latter

he is subrogated to the rights of the creditor. What is, however,

absolutely clear from the authorities is that the rights and remedies to

which the indemnifier is subrogated are those which were vested in the

person to whom payment has been made, no more and no less, and that

rights and liabilities of third parties unconnected with the contract are not

affected.”

I draw particular attention to Lord Jauncey’s observation that subrogation is to be seen at

work in the case of cautionary obligations where the cautioner has paid the creditor.

Lord Chancellor Cairns speaks of indemnifiers “being entitled to succeed to” all

the ways and means by which the person indemnified might have protected himself

against, or reimbursed himself for, the loss. Sometimes it is said that the indemnifier

stands in the shoes of the person whom he has indemnified. Images of the indemnifier

being put in the place of, or standing in the shoes of, the person indemnified are

consistent with the basic idea that one person is “substituted” for the other. They may

also be apt if they conjure up a picture of the indemnifier succeeding to or using the

rights of the person indemnified rather than of the person indemnified transferring those

rights to the indemnifier, as would happen in the case of assignation as usually

understood nowadays in our law. The courts have often made clear that there is a

distinction between subrogation and that kind of assignation. Lord President Emslie

reaffirmed this in Esso Petroleum 1988 S.L.T. at p. 43 D -E:

“Subrogation, however, is not a species of assignation. To take an

example from the circumstances of this case an assignation by the crofters

31

in favour of the pursuers would divest the crofters, for all time, of all their

rights to claim reparation from the first named defenders and others.

Subrogation does not have this effect. It merely gives to the pursuers,

who have compensated these crofters under Tovalop, the opportunity to

take advantage of any means available to these crofters to extinguish or

diminish the loss for which they may be or have been indemnified, and to

have the crofters account for any duplication of compensation.”

The Lord President emphasises that subrogation does not involve the assured divesting

himself of his rights in favour of the insurer; rather, the insurer can take advantage of

the assured’s rights against third parties. This point is perhaps most dramatically

illustrated by the decision of the Court of Appeal that, even after he has been

indemnified, though not completely, the assured can raise proceedings against a third

party, despite the objections of the insurer: Morley v. Moore [1936] 2 K.B. 359.

Similarly, it is because the rights remain the rights of the assured that, when by virtue of

subrogation the insurer raises proceedings against any third party, the proceedings run in

the name of the assured. Only if the assured actually assigns his rights to the insurer can

the insurer raise an action in its own name: Esso Petroleum 1988 S.L.T. at p 878 H;

[1989] A.C. at p. 663 F per Lord Goff citing the decision of Roskill J. in Compania

Colombiana de Seguros v. Pacific Steam Navigation Co. [1965] 1 Q.B. 101.

Subrogation is therefore properly to be distinguished from assignation as that

term is nowadays generally understood and as it is used by Lord Emslie in the passage in

Esso Petroleum. At first sight, at least, it may therefore seem surprising that Lord

Jauncey should have given, as an example of subrogation, the right of a cautioner who

32

pays the debt to take over the rights of the creditor under his agreement with the

principal debtor and with any co-cautioner. After all, the general understanding is that

the cautioner

“is entitled to demand from the creditor an assignation of the debt itself,

of any available diligence or remedy, and of all securities for the debt,

which are in the hands of the creditor” (W. M. Gloag and J. M. Irvine,

Law of Rights in Security (1897), p. 804, emphasis added).

In other words, instead of simply putting the cautioner in a position where he can

exercise the creditor’s rights, the law provides that the cautioner has a right to obtain an

assignation of those rights from the creditor. Superficially at least, this right of the

cautioner to require an assignation does not appear to conform to the idea of subrogation

as explained in the other cases. At a more fundamental level, however, Lord Jauncey’s

comments reveal that the approach of the law in insurance and cautionry is the same:

what has happened is that the law and practice relating to the assignation of rights have

changed.

Nowadays we think of the cedent transferring rights to the assignee. That causes

us no difficulty since modern legal systems tend to recognise that rights are transferable.

At an early stage in its history, however, Scots law regarded contractual rights as being,

of their very nature, personal to the creditor and as therefore not capable of being

transferred to other people. One device, which was adopted to avoid the resulting

practical problems and to give the effects of a transfer, was for the creditor to agree that

the other party could take proceedings to enforce the right, using the creditor’s name but

keeping any sum which was recovered. In other words the creditor made the other party

33

a procurator in rem suam. See, for example, Stair, Institutions 3.1.3; Bell’s Principles,

para. 1459. As Lord President Inglis remarked, a procuratory in rem suam “is just one of

the definitions of an assignation”: British Linen Bank Co. v. Carruthers and Ferguson

(1883) 10 R. 923 at p. 926. Signs of that approach to assignation survive today in the

rule that an assignee may sue either in his own name or in the name of the cedent:

Fraser v. Duguid (1838) 16 S. 1130.

Even after the law came to accept that rights could be transferred, assignations

could still be either direct or indirect. The direct assignation was the form of

assignation, familiar to us today, in which the cedent transfers his right to the assignee.

The indirect form of assignation, which could still be used after the Transmission of

Moveable Property (Scotland) Act 1862, involved the cedent constituting the assignee

his lawful cessioner and assignee. The style was:

“I have made and constituted, as I hereby MAKE, CONSTITUTE and

APPOINT the said C, his executors and assignees, my lawful irrevocable

CESSIONERS and ASSIGNEES, ... in and to [the subject matter] ...

SURROGATING and SUBSTITUTING the said C and his foresaids in

my full right and place of the premises ...” (Juridical Styles (5th edition,

1883) Vol. II, pp. 672 - 673).

This clause is sometimes referred to as the “clause of surrogation” or the “clause of

assignation and surrogation”. See, for instance, W. Ross, Lectures on the History and

Practice of the Law of Scotland, relative to Conveyancing and Legal Diligence (first

edition, 1792, second edition, 1822), p. 192 and J. Craigie, Scottish Law of

Conveyancing Moveable Rights (1894), p. 237.

34

The verb “to surrogate” is a variant form of the verb “to subrogate” and has the

same essential meaning of “to substitute” (Oxford English Dictionary, s.v. surrogate, as a

verb, giving a variety of usages). In these indirect assignations the verb was used to

refer to the cedent putting the assignee into his place as creditor of the various rights.

Whatever may be the precise effects of substitution in the two contexts, the basic idea of

“surrogation” or substitution in indirect assignations is similar to the idea of

“subrogation” or substitution in our law today. So, although it is correct to say that the

idea of subrogation differs from the modern idea of assignation, subrogation was actually

one of the techniques which was used to effect an assignation under our older practice.

For that reason there is nothing anomalous in describing the right of the cautioner as one

of subrogation: subrogation and assignation, as nowadays understood, are just different

techniques which the law uses to achieve the purpose of putting one person into the place

of another so that he can exercise particular rights.

This analysis is confirmed by Pothier, Coutumes des Duché, Baillliage et Prévôté

d’Orléans 20.5.1 where he says that subrogation can come about in different ways,

whether by force of law, by virtue of a requirement which is made of the creditor, by

agreement with the creditor or by agreement with the debtor. In 20.5.2 he gives the

cases of a co-obligant and a surety as examples of the second category where the

subrogation comes about by reason of a requirement made of the creditor. When they

pay, co-obligants and sureties have the right

“d’exiger que le créancier les subroge en tous ses droits, actions,

privileges & hypotheques: ils sont en droit de lui dire: Ou déchargez-

nous, ou subrogez-nous.”

35

Pothier adds that the same rule of charity which obliges us to love our neighbour as

ourselves, and therefore to aid him as much as we can without prejudicing ourselves,

means that the creditor cannot refuse this subrogation. He goes on (20.5. n. 680) to

analyse the position of the party who pays the debt in terms of a procuratory in rem

suam:

“le subrogé, de même que le cessionaire, sont seulement faits procureurs

in rem suam du créancier pour exercer tous les droits, actions,

hypotheques & privileges du créancier, de meme que le créancier l’auroit

pu faire lui-même.”

Reference may also be made to Pothier, Traité des Obligations 2.6.4 and 3.1.6.2.

Pothier’s work had a profound influence on the compilers of the French Code

Civil. Scarcely surprising then can be the language of Article 1251 al. 3 dealing

generally with the position of a co-obligant who pays the common debtor:

“La subrogation a lieu de plein droit:

...

3 Au profit de celui qui, étant tenu avec d’autres ou pour d’autres au

payement de la dette, avait intérêt de l’acquitter....”

Equally unsurprising is the language of Article 2029 on the position of a surety who pays

the common creditor:

“La caution qui a payé la dette est subrogée à tous les droits qu’avait le

créancier contre le débiteur.”

Since the Code does not form part of the law of Quebec, however, it was the analysis of

Pothier and other older French writers which formed the basis of the reasoning of the

36

Privy Council in Quebec Fire Assurance Company v. St. Louis 7 Moo. P.C. at pp. 316 –

317.

Whatever disputes there may be about its basis and origins in our law, one aspect

at least of subrogation, as it applies to insurance, is now settled beyond all doubt: where

the insurer is subrogated to the rights of the assured, it must raise any action in the name

of the assured. As Lord Goff explained in his speech in Esso Petroleum 1988 S.L.T. at

p. 878 F – H; [1989] A.C. at p. 663 E – F, the payment by the insurer indemnifying the

assured does not have the effect of transferring the assured’s rights to the insurer and so

the insurer cannot simply go ahead and itself raise actions based on those rights. None

the less, because the insurer has indemnified the assured, the law gives it the right to

insist that the assured should authorise it to use the assured’s name in proceedings

against third parties. If need be, the insurer can take proceedings to compel the assured

to grant the necessary authority - although in practice the matter is often regulated by a

letter of subrogation which the assured signs at the time of payment, authorising the

insurer to proceed in his name. See also Lord Goff’s remarks in Lord Napier and Ettrick

v. R. F. Kershaw [1993] A.C. 713 at p. 741 C - G. The position is therefore similar to

that envisaged by Pothier in the second of his categories of subrogation.

This basic idea of the assured authorising the insurer to raise proceedings in his

name fits easily into the overall scheme of Scots law which has always recognised that

the creditor in an obligation can constitute another as his procurator in rem suam -

entitled to raise proceedings in the creditor’s name, but also entitled to keep for himself

any sum which he obtains in those proceedings. The procurator in rem suam may not cut

such a figure on our legal scene as once he did but, even after two thousand years, he

37

remains waiting patiently in the wings, ready to act his part whenever, as here, occasion

may demand. On that analysis, the insurer which has indemnified the assured is in effect

entitled to insist that the assured constitute it as his procurator in rem suam for the

purpose of raising proceedings against the third party. It is consistent with this overall

approach that the insurer raises the proceedings in the name of the assured but keeps the

proceeds in order to recoup its expenditure in indemnifying the assured.

1.5 Relief

The parallel which Lord Jauncey draws between the position of an insurer and

the position of a cautioner is helpful also in considering the defenders’ argument that in

this case the insurers should have brought an action of relief against the defenders and

that the present proceedings are incompetent.

The liability of a cautioner is accessory to the liability of the principal debtor.

Among other things this means that it is the principal debtor who is intended to bear the

primary or ultimate liability for the debt. From this essential characteristic of the

relationship flows the right of a cautioner, who pays the debt, to relief and

indemnification from the principal debtor. See Gloag and Irvine, Law of Rights in

Security, pp. 796 - 797:

“Cautioners, on making payment of the debt, or of any portion of the

debt, have a right to relief and indemnification against the principal

debtor, to the full extent to which they have been made answerable for

him. This right of relief on the part of a cautioner against the principal

38

debtor, on whose account he has made payment, arises de jure without

any formal assignation by the creditor.”

The obligation of relief and indemnification arises de iure - out of the fact that

the law regards the principal debtor as having been unjustly enriched by the cautioner

paying the debt which he owed to the creditor. In the same way, an obligation of relief

based on unjust enrichment arises among co-cautioners and other co-obligants in a joint

and several obligation, but the obligation is one of contribution of the co-obligant’s pro

rata share. The availability of this right of relief was disputed among Civil Law scholars

for centuries – since in paying the creditor the cautioner had merely been performing his

contractual obligation and any resulting enrichment of the co-obligant was therefore, so

ran the argument, not unjust. Cf. Pothier, Traité des Obligations 2.2.7.4. But the law

seems to have been settled in Scotland since the time of Stair. See Stair, Institutions

1.8.9 and Stirling v. Forrester (1821) 3 Bligh 575 at p. 596 per Lord Eldon L.C.

Although the basis of the obligation of relief is similar in each case (unjust enrichment),

the extent of that obligation differs in the two situations, the principal debtor being

obliged to relieve the cautioner entirely, a co-cautioner being obliged to relieve him only

pro rata. The difference in the extent of the obligation of relief depends on the much

broader question of how the law views the relationship between the parties in question.

Where, as in the case of the principal debtor and cautioner, the law considers that one

party should ultimately bear the whole burden of the debt to the creditor, then that party

must relieve the other to the full extent. Where on the other hand, as in the case of co-

cautioners, the law considers that the burden of paying the debt should be shared, then a

39

party who pays the whole debt will be entitled to relief in the form of a pro rata

contribution from the others.

Counsel for the defenders argued that in all cases where there was a right to

contribution, it must work in both directions - in other words, if one obligant has a right

of relief against the other, that second obligant must have a similar right against the first.

That will indeed be so where the nature of the relationship is such that each is to bear a

pro rata share of the burden of the debt and the right is, accordingly, properly described

as a right to contribution. It will not, however, be the case where, as with a cautioner

and principal debtor, one of the obligants has the primary or ultimate obligation to the

creditor and the other has a secondary obligation. In that situation, while the cautioner

who pays the debt is entitled not merely to a contribution but to total relief from the

principal debtor, the principal debtor has no corresponding right to any contribution or

relief from the cautioner - for the simple reason that the principal debtor is the person

who is to bear the final responsibility of paying the debt to the creditor.

It follows that, even if we approach the matter in the present case on the footing

that, as the defenders argue, the insurers and the defenders are under parallel obligations

to indemnify the pursuers, that does not in itself tell us anything about the extent of the

rights of relief which arise if the insurers indemnify the pursuers. The extent of those

rights of relief depends on the nature of the overall relationship among the parties.

If the insurers and the defenders were properly to be regarded as co-obligants on

an equal footing in a joint and several obligation to indemnify the pursuers, the insurers

would indeed have a right to relief to the extent of a contribution of their pro rata share

from the defenders. That is the position which the law has adopted in respect of double

40

insurance where two insurers are liable to indemnify the assured in the events which

have happened. Reflecting the commercial reality and the practical understanding of

insurers, the law treats the matter as if there were really only one insurance and the

insurers are seen as co-obligants, each liable to bear a one-half share of the liability.

Accordingly, if one of two insurers indemnifies the assured, it is entitled to recover a

contribution of one-half from the other in an action of relief. See, for instance, Sickness

and Accident Assurance Association Ltd. v. General Accident Assurance Corporation

Ltd. 19 R. at p. 980 per Lord Low.

On the other hand if, as I have held, both the insurers and the defenders in the

present cases are under an obligation to indemnify the pursuers but, as between the

defenders and the insurers, the defenders should bear the ultimate liability, then the

insurers have a right to total relief from the defenders. It follows that the defenders have

no corresponding right of relief against the insurers. In other words, the insurers are like

the cautioner who can bring an action of relief to recover the whole of his expenditure

from the principal debtor but is not subject to any obligation of relief towards the

principal debtor.

In Glasgow Provident Investment Society v. Westminster Fire Office (1887) 14 R.

947 at p. 992 Lord Young, dissenting, drew a similar distinction between the situation

where a party is entitled to total relief and the situation where he is entitled to a

contribution only. The kind of distinction which Lord Young drew is valid, even though

his dissenting opinion was not ultimately to prevail: Westminster Fire Office v. Glasgow

Provident Investment Society (1888) 15 R. (H.L.) 89. I should add that I do not consider

that Kitto J. intended to say anything inconsistent with this analysis in Albion Insurance

41

Co. Ltd. v. Government Insurance Office of New South Wales (1969) 121 C.L.R. 342 at

p. 352. If he did, then I should respectfully disagree with his view.

In summary: an insurer which pays an assured should in principle be entitled by

virtue of subrogation to bring proceedings in the name of the assured to recover its

expenditure in indemnifying the assured; similarly, an insurer which pays an assured

should in principle be entitled to a right of relief against another indemnifier to recover

its expenditure in indemnifying the assured, where, as here, the law holds that the other

indemnifier should bear the primary or ultimate responsibility for indemnifying the

assured.

1.6 The Supposed Inconsistency between Subrogation and Relief

The defenders argued, however, that, if the insurers’ right against the defenders

was properly to be analysed as one of relief, the present action was necessarily irrelevant,

since the insurers should have brought an action of relief in their own names against the

defenders, rather than a subrogated action in the name of the pursuers. I reject that

argument.

As the passage which I have quoted from Gloag and Irvine on Rights in Security,

pp. 796 - 797 makes clear, a cautioner who pays has a right of total relief from the

principal debtor as well as a right of relief in the form of a pro rata contribution from his

co-cautioners, if any. It is well settled that, for the purposes of working out these rights

against the principal debtor and the co-cautioners, the cautioner has the beneficium

cedendarum actionum which entitles him to demand from the creditor in exchange for

42

payment “an assignation of the debt, any security held for it, and any diligence done

upon it, so as to enable him to enforce his right of relief against the principal debtor, or

against co-cautioners”: W. M. Gloag and R. C. Henderson, The Law of Scotland (10th

edition, 1995), para. 20.15. Bell, Principles, para. 255 states in part:

“Relief is a right on the part of the cautioner to indemnification against

the principal debtor. It rests on two grounds: an equitable right to require

the creditor to communicate the full benefit of his contract; and an

obligation ex mandato of the principal debtor, for whose benefit the

cautioner has engaged. By the former, the cautioner is entitled to an

assignation of the debt and diligence; and on satisfying the creditor

comes into his place, and may proceed as principal creditor.”

The last sentence is vouched by a tract of authority stretching back beyond the time of

Stair.

The position as set out in these texts is that, where the cautioner has a right of

total relief against the principal debtor and is therefore entitled to recover the full amount

of the debt which he paid to the creditor, he can seek to recover the sum due to him by

virtue of his right of relief by taking an assignation of the creditor’s rights against the

principal debtor and proceeding on the basis of the principal creditor’s rights. Indeed,

given that an assignee can sue in the name of his cedent, there is no reason why he

should not raise any necessary proceedings in the name of the creditor - and this is

indeed what Bell seems to envisage in the last sentence of the passage which I have

quoted. In the same way Bell, Principles, para. 268 notes that, so far as the position of

co-cautioners is concerned, at one time it was held that the beneficium cedendarum

43

actionum was unnecessary in our law and “that an assignation could not be demanded.

But it is now settled that an assignation may be demanded” (emphasis as in the original).

It is recognised, for instance by Lord President Emslie and Lord Jauncey in Esso

Petroleum, that the same principles of the law of indemnity underlie both the law of

cautionry and the law of insurance. The principles which have been worked out in

cautionry may therefore afford guidance on this aspect of the law of insurance.

Consistently with those principles, an insurer may raise proceedings in the name of the

assured when the assured has authorised it to do so and, as a procurator in rem suam, the

insurer is in the same position as an assignee under the old form of assignation. More

particularly, the insurer may raise such proceedings where the assured has a primary

right against a third party under a contract of indemnity and the purpose of the

proceedings is for the insurer to recover the sum which it paid to the assured and in

respect of which it is entitled to total relief from the third party. A subrogated action

against a third party is a recognised and perfectly proper way of working out a right of

relief against that third party. Moreover, the defenders, who have all along been well

aware that the present test actions - with the partial exception of the Stena Offshore

action - have been brought by the insurers to recover sums expended by them, have

never suggested that, as defenders, they have thereby been prejudiced, e.g. by not being

in a position to obtain a discharge from the insurers. Had they raised any such difficulty,

the matter could have been resolved, for instance, by allowing the insurers to be sisted as

pursuers. Cf. Fraser v. Dunbar (1839) 1 D. 882. For this reason, I would reject the

defenders’ argument that the present actions by the insurers, even though raised in the

name of the pursuers and with their consent, would be irrelevant if the correct analysis

44

were that the insurers had a right of total relief against the defenders. Equally, even on

the defenders’ assumption - which I reject - that the insurers were entitled to relief only

to the extent of a pro rata contribution, it appears to me that the present actions would be

competent on the basis that the insurers had a claim of relief against the defenders and

were authorised to raise the proceedings in the name of the pursuers. The actions would

be relevant, however, only to the extent of the pro rata contribution due from the

defenders.

I emphasise that the approach which I have outlined would not apply, of course,

to cases of double insurance. As Lord Low stressed in Sickness and Accident Assurance

19 R. at p. 980, double insurance has been treated in a somewhat special manner by the

law. The various policies taken out by the assured are treated as truly one insurance and

an assured who has been indemnified by one of the insurers cannot recover any more

from another insurer. Lord Low’s approach was adopted by Barwick C.J. in Albion

Insurance 121 C.L.R. at p. 347. Having explained the particular analysis which applies

in cases of double insurance, Lord Low goes on to distinguish the situation in double

insurance from the situation where an assured has a primary right against a third party.

In double insurance the assured has no such primary right against any third party and so

there is no right which an insurer can use to enforce its right to a pro rata contribution

from any other insurer. In cases of double insurance, therefore, the insurer’s only way to

enforce its right to the appropriate contribution is by means of an action of relief. See

also the decision of the High Court of Australia in Sydney Turf Club v. Crowley (1972)

126 C.L.R. 420.

45

Counsel for the defenders attached considerable importance to one particular

argument: that a right of relief or contribution between the insurers and the defenders

was necessarily inconsistent with a subrogated claim by the insurers, since a subrogated

claim presupposed the continuing existence of a right of action by the pursuers against

the defenders, whereas a right of relief presupposed that the right of action by the

pursuers had been extinguished. Indeed the right of relief, it was said, would arise only

because the defenders had been enriched by the pursuers’ right of action being

extinguished when they were indemnified by the insurers. Counsel referred to a passage

from the speech of Lord Goff in Esso Petroleum 1988 S.L.T. at p. 878 B - E; [1989]

A.C. at pp. 662 G – 663 B. To a considerable extent counsel for the pursuers seemed to

accept and to endorse that line of argument, although they sought to turn it back against

the defenders: because the insurers had a subrogated claim against the defenders, there

could be no question of a right of relief between the insurers and the defenders.

However logical such an argument may be, it does not represent the law. The life

of the Civil Law, no less than of the Common Law, “has not been logic: it has been

experience.” Countless generations of experience in many lands have taught that it is

useful for sureties (Scotice cautioners) and co-obligants who have a right of relief to be

able to enforce it by using the rights of the creditors whom they have paid. Hence the

law has given them the right both to obtain assignations of the creditors’ rights against

the principal debtors or co-obligants and to exercise the rights thus acquired. Those

assignations would be at best pointless, if the payments to the creditors had the effect of

extinguishing the creditors’ rights altogether. So the law proceeds on the basis that the

46

sureties or cautioners and co-obligants can exercise the creditors’ rights and, to that

extent at least, those rights survive the payment to the creditors.

Mr. Wolffe described this aspect of the law as “a conundrum”, but it is a

conundrum which has been exercising lawyers across Europe and beyond since the

beneficium cedendarum actionum first made its appearance in the law of ancient Rome.

In D.46.1.36, Paul 14 ad Plautium, Paul overcomes essentially the same objection as the

defenders’ by arguing that, when a surety pays a debt, the payment to the creditor is not

made in order to pay off the debt owed by the principal debtor but “in a certain way” to

buy it. This ingenious, if somewhat tortured, reasoning is significant precisely because it

shows that, when Paul was writing in the early third century A.D., the law was already

settled and he had no option but to try to rationalise it - a comparatively early example of

legal pragmatism, perhaps. About a millennium-and-a-half later, Pothier, Coutumes des

Duché, Baillliage et Prévôté d’Orléans 20.5 n. 67 follows Paul’s line of reasoning:

“le paiement, quoique fait avec subrogation, est un vrai paiement, & ce

n’est que par une fiction que celui qui est subrogé au créancier, est censé

avoir plutôt acheté de lui sa créance, que l’avoir payé; magis emisse

nomen quam solvisse intelligitur; laquelle fiction ne doit profiter qu’à

lui.”

It is noteworthy that Pothier sees the fiction that the payment has been made to buy the

debt as being designed purely for the benefit of the party who has paid the creditor – as

between the creditor and the debtor, the payment has the effect of extinguishing the debt.

Building on that tradition, the Dalloz commentary on Articles 1252 and 2029 of the

French Code Civil summarises the position in this way:

47

“Le paiement avec subrogation s’il a pour effet d’éteindre la créance à

l’égard du créancier, la laisse subsister au profit du subrogé qui dispose de

toutes les actions qui appartenaient au créancier et qui se rattachaient à

cette créance immédiatement avant le paiement.”

Similarly, under the German Bürgerliches Gesetzbuch the creditor’s rights against the

principal debtor (Article 774) and co-sureties (Article 426 II) survive and pass to the

surety who has paid the debt. Under Article 426 II the same applies generally where one

co-obligant pays the common debtor. For Scots law Bell, Principles, para. 558, dealing

not only with cautioners but with co-obligants, formulated the same ancient paradox

perhaps as elegantly as may be:

“Payment made by one interested in the debt (as co-obligant or surety)

will take away the right of the creditor, but will not extinguish the debt of

the principal obligant. The person so paying is entitled to an assignation,

to the effect of operating his relief.”

The observations of Lord Goff in Esso Petroleum are not inconsistent with what

is said by Bell. Lord Goff was concerned with the situation where crofters had suffered

damage due to an oil spill for which Hall Russell were said to be responsible. The

crofters would have had a right to sue Hall Russell in delict. In fact, however, Esso

indemnified the crofters for their loss - as they were required to do by an agreement

among tanker owners, though not under any agreement with the crofters. Esso then

sought to bring an action in their own name against Hall Russell, to recover the sums

which Esso had paid to the crofters. The House of Lords rejected that claim as

48

irrelevant. Lord Goff explained the position in this way (1988 S.L.T. at p. 878 A – F;

[1989] A.C. at pp. 662 F – 663 D):

“I take the example of the crofters’ claims, since these were the claims

concentrated upon in argument ... The primary submission of counsel

was that Esso was entitled to be subrogated to the crofters’ claims in tort

against Hall Russell, and further that Esso was entitled to pursue such

claims against Hall Russell in its own name. In my opinion, this

submission is not well founded.

In considering this submission, I proceed on the basis (which appears to

have been common ground throughout the case) that there is for present

purposes no material distinction between Scots law and English law.

Now, let it be assumed that the effect of Esso’s payment to the crofters

was to indemnify the crofters in respect of loss or damage suffered by

them by reason of the wrongdoing of Hall Russell. If such a payment was

made under a contract of indemnity between Esso and the crofters, there

can be no doubt that Esso would upon payment be subrogated to the

crofters’ claims against Hall Russell. This would enable Esso to proceed

against Hall Russell in the names of the crofters; but it would not enable

Esso to proceed, without more, to enforce the crofters’ claims by an

action in its own name against Hall Russell.

The reason for this is plain. It is that Esso’s payment to the crofters does

not have the effect of discharging Hall Russell’s liability to them. That

being so, I do not see how Esso can have a direct claim against Hall

49

Russell in respect of its payment. I put on one side Esso’s claim against

Hall Russell in negligence: that I will consider in a moment. There can

of course be no direct claim by Esso against Hall Russell in restitution, if

only because Esso has not by its payment discharged the liability of Hall

Russell, and so has not enriched Hall Russell; if anybody has been

enriched, it is the crofters, to the extent that they have been indemnified

by Esso and yet continue to have vested in them rights of action against

Hall Russell in respect of the loss or damage which was the subject matter

of Esso’s payment to them. All that is left is the fact that the crofters’

rights of action against Hall Russell continued to exist (until the expiry of

the relevant limitation period), and that it might have been inequitable to

deny Esso the opportunity to take advantage of them - which is the classic

basis of the doctrine of subrogation in the case of contracts of indemnity

(see Castellain v. Preston).”

There is a certain difficulty in drawing guidance from the passage for present

purposes, since Lord Goff was proceeding on the basis of the concession that the law of

Scotland was the same as the law of England and so, understandably, he used the

terminology of English law. The actual matter which he had to decide was whether Esso

could bring an action in their own name to enforce the crofters’ claims in delict against

Hall Russell on the basis of subrogation. Lord Goff held that they could not, since an

action brought by an indemnifier on the basis of subrogation would have to be raised in

the name of the party indemnified. That issue does not, of course, arise in the present

case.

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The actual situation considered by Lord Goff differed in two respects from the

situations contemplated by Bell. In the first place, Lord Goff was considering the effect

of the payment by Esso to the crofters on Hall Russell’s liability to them in delict. Bell,

on the other hand, was considering the effect, on the principal debtor’s contractual

liability, of a payment to the creditor by a surety or a co-obligant. Secondly, Esso were

under no contractual liability to make the payment to the crofters. By contrast, in the

cases considered by Bell, the surety or co-obligant pays the creditor because he is

obliged to do so in terms of his contract with the creditor. Although Lord Goff did not

spell this out, the fact that Esso were under no obligation to the crofters or to Hall

Russell to make the payment was undoubtedly of significance for his approach. In

English law terms, Esso were “volunteers” and payment by a volunteer does not

discharge the debt unless and until the debtor adopts the payment. See Lord Goff and G.

Jones, The Law of Restitution (fifth edition, 1998), pp. 127-128; P. Birks and J. Beatson

“Unrequested Payment of Another’s Debt” in J. Beatson, The Use and Abuse of Unjust

Enrichment (1991), p. 177, including p. 201 n. 6 in the Postscript; and G. Virgo, The

Principles of the Law of Restitution (1999), pp. 236 - 238. It is not altogether clear

whether the same rule applies in Scots law to payments made by someone who is under

no obligation to make them. See, for instance “Obligations” in Stair Memorial

Encyclopaedia Vol. 15 (1996), para. 97 (N.R. Whitty). But there is no need to explore

the matter since, in so far as Lord Goff is contemplating that type of case, his comments

are not directed at the kind of situation with which we are concerned.

Lord Goff’s remark that, because the payments to the crofters did not discharge

Hall Russell’s liability to them, he could not see how Esso could have a direct claim

51

against Hall Russell in respect of their payment to them, was the passage on which

counsel relied for saying that the possibility of subrogation is inconsistent with the

existence of a right of relief. For the reasons already given, however, the situation in

respect of which Lord Goff made that comment is distinguishable from the situation

upon which Bell was commenting and which arises in the present case. Bell does not

deal with the case of a payment made to the creditor in a delictal obligation, but, at least

in the context of payments by a surety or a co-obligant, he contemplates that the payment

“will take away” the creditor’s right against the principal debtor, with the result that the

surety or co-obligant obtains a right of relief against the principal debtor. At the same

time, he holds that the payment “will not extinguish” the debt of the principal debtor

which is therefore available to the surety or co-obligant to whom it is assigned in order

to operate his relief.

The present case is analogous to the cases contemplated by Bell since the insurers

indemnified the pursuers by virtue of their obligation under their contract with them.

For these purposes we may consider the matter on the basis suggested by counsel for the

defenders: the insurers and the defenders are looked upon as contractual co-obligants,

one of whom has paid the common creditor but is entitled to relief from the other. On

Bell’s approach, the payment may have taken away the pursuers’ own right as creditors

to sue the defenders on the indemnity clauses, but it has not extinguished the liability of

the defenders under the indemnities for the purposes of an action brought by the insurers

in the name of the pursuers and with their authority. That action is a means by which the

insurers can enforce their right to relief against the defenders.

52

1.7 Conclusion

On the basis of the authorities which I have discussed, in Scots law at least, there

is no inconsistency in holding that an insurer which indemnifies the assured has in theory

two methods of recovering its expenditure from another indemnifier who is meant to

bear the ultimate liability for indemnifying the assured. The insurer can rely on its right

of total relief from the indemnifier and raise an action of relief in its own name.

Alternatively, it can seek in substance to work out its right of relief by bringing

proceedings in the name of the assured against the indemnifier on the basis of the

contract or clause of indemnity. That is what the insurers have done in this case and

nothing in the authorities which I have examined suggests that the action is other than

competent and relevant.

For these reasons I am satisfied that the Lord Ordinary - who, of course, heard a

much more limited argument on the point than we did - was wrong to sustain the

defenders’ general pleas to the relevancy.

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2. CONSTRUCTION OF THE INDEMNITIES

The pursuers’ case against the defenders depends on the indemnity provisions in

the various contracts. Issues relating to the construction of the indemnities lie at the

heart of the case. An account of the arguments to which we listened is to be found in

Part 3(a) of Lord Coulsfield’s opinion. When dealing with them in this part of the

opinion I shall, for the most part, adopt the terminology of the indemnities except that, in

order to simplify matters, I shall refer to the Company and the others entitled to benefit

from the indemnities collectively as “the operators”. It was common ground that, in

interpreting the indemnities, the court required to take account of the statutory régime

which applies to work in the North Sea. Less happily, counsel were not agreed on

precisely what conclusions we should draw from the existence of that system.

2.1 The Statutory Régime in the North Sea

The foundation statute is the Mineral Workings (Offshore Installations) Act 1971

(“the 1971 Act”). Section 6 of the Act gives the Secretary of State power to make

regulations for the safety, health and welfare of persons on offshore installations. By

virtue of Section 11(1) and (2) any breach of a duty imposed by any provision of the

1971 Act or by any provision of regulations made under the Act which expressly applies

the provisions of Section 11 is to be actionable so far, and only so far, as it causes

personal injury as defined in subsection (7).

54

For present purposes the important regulations are to be found in The Offshore

Installations (Operational Safety, Health and Welfare) Regulations 1976 (No. 1019)(“the

1976 Regulations”). Regulation 32(1) imposes a far-reaching duty on various persons:

“It shall be the duty of the installation manager, and of the owner of the

installation and of the concession owner, to ensure that the provisions of

these Regulations are complied with in respect of any offshore

installation.”

Regulation 32(2) and (3) go on to provide inter alia:

“(2) It shall be the duty of the employer of an employee employed by

him for work on or near an offshore installation to ensure that the

employee complies with any provision of these Regulations imposing a

duty on him or expressly prohibiting him from doing a specified act.

(3) It shall be the duty of every person while on or near an offshore

installation -

(a) not to do anything likely to endanger the safety or health of himself or

other persons on or near the installation or to render unsafe any equipment

used on or near it....”

Regulation 33 provides that the provisions of Section 11 of the 1971 Act are to apply to

the duties imposed on any person by the Regulations. It follows that breaches of the

Regulations give rise to civil liability for personal injury caused by the breach. Although

Regulation 34(4) gives a defence to a person who is prosecuted for a breach of the

Regulations, if he can show that he exercised all due diligence to prevent the commission

of the offence and that the relevant contravention was committed without his consent,

55

connivance or wilful default, those defences are not available to a defender in civil

proceedings.

The effect of these Regulations was not in dispute. If an employee of the

operators did anything which was likely to endanger the safety or health of himself or

other persons, then he himself would be in breach of Regulation 32(3), and the operators

would be in breach of Regulation 32(1). No contractor would be liable. If, on the other

hand, an employee of a contractor did anything which was likely to endanger the safety

or health of himself or other persons, then he himself would again be in breach of

Regulation 32(3), and the operators would be in breach of Regulation 32(1), but in

addition the contractor who employed him would be in breach of Regulation 32(2).

Each of the test cases involves a different contractor and a different contract.

Part 2(b) of Lord Coulsfield’s opinion gives a full account of the contracts. For present

purposes I note that all the contracts contain indemnities, of course, but the terms of the

indemnities are not identical. In broad terms the contracts fall into two groups: those

where the indemnities are to be found in a clause comprising a single paragraph and

those where the indemnity clause is divided into two paragraphs, the first containing a

provision in rather general terms and the second containing more specific provisions.

The London Bridge, Northern Industrial Marine and Stena Offshore contracts fall into

the first group, as does the British Telecom contract - even though its terms are rather

different from those found in the other contracts. The second group comprises the

Eastman Christensen, Kelvin Catering and Wood Group contracts. Again there are

certain differences in their wording. I find it convenient to begin with the first group

and, like counsel, I use the London Bridge contract as the example.

56

2.2 The London Bridge Contract

In the London Bridge contract the Contractor’s indemnities are to be found in

Article 17 which provides inter alia:

“17.1 CONTRACTOR’S INDEMNITIES

The Contractor shall indemnify, hold harmless and defend the Company

and its parent, subsidiary and affiliate corporations and Participants, and

their respective officers, employees, agents and representatives from and

against any claim, demand, cause of action, loss, expense or liability

(including but not limited to the costs of litigation) arising (whether

before or after completion of the Work hereunder) by reason of:-

a. Non-compliance with Laws

Claims by governmental authorities or others of any actual or asserted

failure of the Contractor to comply with any law, ordinance, regulation,

rule or order of any governmental or judicial body; and

b. Intellectual Property Infringement

(Including Patents and Copyrights)

Actual or asserted infringement or improper appropriation or use by the

Company, Participants or Contractor of trade secrets, proprietary

information, know-how, copyright rights (both statutory and non-

statutory), or patented or unpatent [sic] inventions or for actual or alleged

unauthorised imitation of the work of others, arising out of the use of

57

methods, processes, designs, information or other things originating with

the Contractor, its employees, agents, vendors or sub-contractors, and

furnished or communicated to the Company by the Contractor or used by

the Contractor in connection with performance of the Work and which

have not been specified by the Company; and

c. Injury to Employees and Damage to Property of Contractor

Injury to or death of persons employed by or damage to or loss or

destruction of property of the Contractor or its parent, subsidiary or

affiliate corporations, or the Contractor’s agents, sub-contractors or

suppliers, irrespective of any contributory negligence, whether active or

passive, of the party to be indemnified, unless such injury, death, damage,

loss or destruction was caused by the sole negligence or wilful

misconduct of the party which would otherwise be indemnified; and

d. Third Party Injury and Property Damage

Injury, death, or property damage, loss or destruction (up to a limit of

Five Hundred Thousand Pounds Sterling (£500,000) in respect of

performance of this contract at an onshore location and up to a limit of

One Million Pounds (£1,000,000) in respect of performance at an

offshore location) other than such as is described in Articles 17.1 (c) and

17.2 (a) and (b), and arising directly or indirectly out of the acts or

omissions of the Contractor or its sub-contractors, suppliers or their

respective employees or agents, irrespective of any contributory

negligence, whether active or passive, of the party to be indemnified,

58

unless such injury, death, damage, loss or destruction was caused by the

sole negligence or wilful misconduct of the party which would otherwise

be indemnified; and

e. Pollution

Waste, debris, rubbish, liquid or non-liquid discharge or pollution of

whatever nature which is dropped, seeped, discharged, spilled, blown out

or leaked from equipment, apparatus, machinery, facilities or other

property of the Contractor or its sub-contractors, suppliers, employees or

agents, irrespective or [sic] any contributory negligence, whether active or

passive, of the party to be indemnified except to the extent that the

foregoing was caused by the sole negligence or wilful misconduct of the

party which would otherwise be indemnified.”

In this contract where the specific indemnities are not preceded by any general

provision, the defenders argued, on the basis of the terms of indemnity (c) itself, that the

indemnity was intended to apply only where the injury to, or death of, the Contractor’s

employee had been due to the negligence or breach of statutory duty of the Contractor.

Indemnity (c) makes no express mention of the Contractor’s negligence or breach of

statutory duty, of course, but counsel argued that one could legitimately infer that this

was what the parties had intended from the use of the phrase “irrespective of any

contributory negligence ... of the party to be indemnified”. The use of the word

“contributory” immediately prompted the question “Contributory to what?” and the

appropriate answer was “contributory to the negligence or breach of statutory duty of the

Contractor” since the Article was concerned with regulating the relationship between the

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operators and the Contractor. Counsel for the defenders acknowledged that, in theory at

least, the answer to the question “Contributory to what?” might be “contributory to any

contractor’s negligence or breach of statutory duty”, but they submitted that such a

construction ignored the commercial realities. It would make no sense for the Contractor

to stipulate that it should not be liable if the injury or damage was due to the negligence

of the operators alone, but accept liability if, in addition to the operators, some other

contractor had been negligent, even to the very smallest extent. Moreover, in

interpreting the phrase “sole negligence”, one had to read it in the context of the contract

to which there were only two parties: so it should be interpreted as referring to the

situation where the loss, injury or damage had been caused exclusively by the negligence

or wilful misconduct of the operators and not to any extent by the negligence or breach

of statutory duty of the Contractor. It therefore referred to the sole negligence of the

party to be indemnified as opposed to negligence by the operators concurring with

negligence or breach of statutory duty by the other party to the contract, viz. the

Contractor.

The defenders’ argument depends on implying words into the clause which

would define the injury, death or damage to property as having been “caused by the

negligence or breach of statutory duty of the Contractor”. The basis for implying these

words is said to be the reference to “contributory negligence” in the phrase “irrespective

of any contributory negligence ... of the party to be indemnified”. To any lawyer, at

least, the words “contributory negligence” immediately call to mind the negligence of,

say, a pursuer who has suffered injury in an accident which has occurred partly as the

result of the negligence of the defender and partly as a result of her own negligence and

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whose damages may be reduced in terms of the Law Reform (Contributory Negligence)

Act 1945 to reflect the extent of her negligence. In that context, of course, especially in

a simple case involving only one defender, the appropriate way to unpack the meaning of

“contributory” is to say that the negligence of the pursuer has played its part, along with

negligence or other fault on the part of the defender, in causing the injury to the pursuer.

It is natural in that situation to see “contributory” as pointing to some corresponding

negligence or fault on the part of the defender. It is plain, however, that this is not the

meaning of “contributory negligence” in the indemnity, since the words are used to

describe not negligence on the part of the employee who has been injured or killed, or of

the owner of the damaged property, but negligence on the part of the operators who are

seeking the indemnity. The question therefore is whether, when used in that way, the

phrase carries with it the implication for which counsel for the defenders contended.

Counsel for the pursuers submitted that in this clause “contributory” was used

simply to show that the negligence of the operators had caused the death, injury or

damage for which indemnity was being sought. Undoubtedly, the clause does envisage a

situation where the operators’ negligence has played a part in causing the death, injury or

damage, but it seems to me that in construing the words “contributory negligence” a

court requires to bear in mind the other words, “the sole negligence ... of the party which

would otherwise be indemnified”. There is a contrast between the two: where there has

been “contributory negligence” on the part of the operators, they may still recover under

the indemnity, but where the death, injury or damage was caused by “the sole

negligence” of the operators, they cannot recover. In that overall context the phrase

“irrespective of any contributory negligence ... of the party to be indemnified” means

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that the Contractor is to indemnify the operators even if the operators’ negligence has

contributed, along with some other negligence or fault, to the happening of the death,

injury or damage. The phrase describes a situation where the operators have been

negligent and others have also been negligent or otherwise at fault. By contrast, the

indemnity is not to be available to the operators where the death, injury or damage has

been due exclusively to negligence or wilful misconduct on the part of the operators.

Strictly speaking, as Lord Coulsfield pointed out in the course of the debate, on this

approach the word “contributory” is de trop since the later reference to “the sole

negligence” of the operators would necessarily imply that the earlier reference was to the

negligence of the operators and someone else.

If that is the way in which the phrase “contributory negligence” is used in this

clause, the question comes to be whether the use of that phrase justifies the implication

that the indemnity is to apply only where the Contractor has been negligent or in breach

of statutory duty. That interpretation does indeed appear to me to be open to the

objection which was pointed out by counsel for the pursuers: on the defenders’ approach

it is superfluous to provide that the indemnity will not apply where the death, injury or

damage is caused by “the sole negligence” of the operators, since, if the death, injury or

damage is caused exclusively by the negligence of the operators, ipso facto it cannot

have arisen out of the negligence or breach of statutory duty of the Contractor - so the

indemnity would not apply even if the reference to sole negligence were omitted. By

contrast the words can be given content, if the clause is interpreted as meaning that the

indemnity applies, irrespective of whether the Contractor was in any way at fault or not.

On that approach the references to “negligence” make it clear that the operators can

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recover even though their negligence was a cause of the event, providing that it was not

the sole cause. That argument is one to which I attach some weight, though the fact that,

even on the pursuers’ interpretation, the clause contains a superfluous element suggests

that it is not an argument which in itself could be conclusive.

The defenders’ interpretation depends on implying elements into the clause

which are not spelled out. In itself the mere fact that the interpretation depends on an

element of implication is not a fatal criticism, since all counsel agreed that some of the

elements in the clause are expressed in a shorthand form. Inevitably therefore, when

construing the clause, the reader has to expand somewhat on the words which the

draftsman has used. To that extent, it is necessary to spell out elements which are

implied by the language of the clause. The real difference between the parties is not as

to whether some elements need to be implied but as to the nature of any such elements.

It is obvious that the qualification which the defenders say is implied into the

clause is extremely significant and would greatly cut down the scope of the indemnity.

It would, in my view, be somewhat surprising if the parties had left such a vital

qualification to be imported by mere implication. It would be all the more surprising, I

believe, if that implication were to rest on words which are intended, not to narrow the

basis of the Contractor’s liability, but to make it clear that the indemnity extends to

certain cases where the operators have been negligent - thus extending the scope of the

indemnity beyond the range which it would have in the absence of some such words.

2.3 General Approach to Interpretation of Indemnities

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In advancing their argument that the indemnity should be read as being subject to

a qualification of this kind, the defenders relied on what they said was the approach to

the interpretation of indemnities which has been established by authorities applying in

Scots law as well as in English law. The cases to which we were referred are well

known. Much of the discussion in them concerns the question of whether an indemnity

is to be interpreted as applying where the person to be indemnified has been negligent.

That particular problem does not arise in the present cases since in all of them the

indemnity is expressly said to apply even where there has been “contributory negligence”

on the part of the operators. But the defenders relied on the cases for the indications

which they were said to contain as to the general approach which courts should take to

the construction of indemnities.

In view of the complications which readily enter into any consideration of such

clauses, it is as well to remember that in Smith v. U.M.B. Chrysler 1978 S.C. (H.L.) 1 at

p. 16 Lord Keith of Kinkel said that the task of a court which has to construe an

indemnity clause

“is essentially one of ascertaining the intention of the contracting parties

from the language they have used, considered in the light of the

surrounding circumstances which must be taken to have been within their

knowledge.”

Put in that way, the task of the court is no different from its task in construing any

contractual provision. As Lord Keith goes on to explain, however, the advice of the

Privy Council in Canada Steamship Lines Ltd. v. The King [1952] A.C. 192 contains

“certain guidelines of assistance” in construing exemption and indemnity clauses. The

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application of these guidelines is not, however, an end in itself; they are applied by the

courts because they are thought to be of practical assistance in discovering what the

parties actually intended the clause to mean. For that reason Lord Keith is at pains to

stress (1978 S.C. (H.L.) at pp. 16 - 17) that the guidelines

“do not represent rules of law, but simply particular applications of wider

general principles of construction, the rule that express language must

receive due effect and the rule omnia praesumuntur contra proferentem.”

Lord Keith sees the rules of construction applying to exemption and indemnity clauses as

being nothing more than particular applications of the general principle that one must

give due effect to the express language of an agreement and that a contract is construed

against the person who relies on it. Indeed, when the three rules in Canada Steamship

are examined, they can be seen to meet the description given by Lord Keith: the first

relies on giving effect to the express language of the contract; the second depends again

on examining the language used by the parties to see whether it is capable of covering

liability arising out of the negligence of the party relying on the indemnity; while the

third proceeds on the basis that, where the language used is capable of more than one

interpretation, the court should interpret it against the party who seeks to rely on it.

It is the contra proferentem rule which is of interest in this case. It appears that

the rule is applied in a strict fashion in the case of indemnity clauses because the courts

have taken the view that it is prima facie unlikely that one party will agree to indemnify

another for losses which are due to that party’s negligence. That being so, an indemnity

clause will not be construed as applying to that situation unless the language is

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sufficiently clear. So, in Gillespie Bros. & Co. Ltd. v. Roy Bowles Transport Ltd. [1973]

Q.B. 400 at p. 419 Buckley L.J. said that it is

“a fundamental consideration in the construction of contracts of this kind

that it is inherently improbable that one party to the contract should intend

to absolve the other party from the consequences of the latter’s own

negligence.”

Picking up that theme in Smith, Viscount Dilhorne remarked (1978 S.C. (H.L.) at p. 7)

that

“While an indemnity clause may be regarded as the obverse of an

exemption clause, when considering the meaning of such a clause one

must, I think, regard it as even more inherently improbable that one party

should agree to discharge the liability of the other party for acts for which

he is responsible. In my opinion it is the case that the imposition by the

proferens on the other party of liability to indemnify him against the

consequences of his own negligence must be imposed by very clear

words”

In much the same way in the same case Lord Keith remarks (1978 S.C. (H.L.) at p. 17)

that while the particular applications of the general rules of construction

“apply to the construction both of a clause bearing to exempt from certain

liabilities a party who has undertaken to carry out contractual work and of

a clause whereby such a party has agreed to indemnify the other party

against liabilities which would ordinarily fall upon him, they apply a

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fortiori in the latter case, since it represents a less usual and more extreme

situation.”

It is apparent that both Viscount Dilhorne and Lord Keith perceived that the

argument for applying the relevant rules of strict construction was even more cogent in

the case of an indemnity clause than in the case of an exemption clause since the

indemnity clause goes further than an exemption clause and actually involves the other

party taking on the first party’s liability. A party is even less likely to take on the other

party’s liability for negligence than he is to exempt the other party from liability for

negligence. Even so, I very much doubt whether, as counsel for the defenders suggested,

their Lordships intended to go further and to deduce from this that a still stricter form of

the relevant rules of construction is to be applied in the case of indemnity clauses than in

the case of exemption clauses. There is no indication in subsequent guidance from the

House of Lords that this was what was intended. In Ailsa Craig Fishing Co. Ltd. v.

Malvern Fishing Co. Ltd. 1982 S.C. (H.L.) 14 at p. 61 Lord Fraser contrasted the

“specially exacting standards which are applied to exclusion and indemnity clauses” with

the standard to be applied to limitation clauses - thus apparently making no distinction

between indemnity and exemption clauses. Similarly in Bovis Construction (Scotland)

Ltd. v. Whatlings Construction Ltd. 1995 S.C. (H.L.) 19 at p. 23 Lord Jauncey, citing

Ailsa Craig, indicated that limitation clauses were not to be construed with the same

strictness as “an exclusion or indemnity clause”.

Counsel for the defenders accepted, of course, that the particular issue of

construction which arose in Canada Steamships and Smith does not arise here, but they

submitted that the general approach was relevant. Although the Contractor had

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undertaken to indemnify the operators where they were negligent (but not solely

negligent), that was such an unusual liability for the Contractor to undertake that, where

more than one interpretation was possible, we should interpret the clause in such a way

as to restrict the scope of that liability. In particular, we should interpret the indemnity

so as to restrict it to situations where the Contractor had been negligent or acted in

breach of statutory duty.

For my part I am satisfied on the basis of the cases which I have mentioned that

our task is to interpret the language of the indemnity in the circumstances known to the

parties, but that where that language is ambiguous it should be interpreted against the

operators who rely on the indemnity. I would also accept that we should measure the

extent of the indemnity by what we can deduce from “very clear words” (Canada

Steamships per Lord Morton [1952] A.C. at p. 211 applied by Viscount Dilhorne in

Smith 1978 S.C. (H.L.) at p. 7). On the other hand I find in the speeches which I have

examined no warrant for saying that a court should more readily imply into a clause of

indemnity additional words restricting the scope of the indemnity.

2.4 Clause (c) in the Context of the other Indmenities in Article 17.1 of the London

Bridge Contract

Although we are concerned in particular with the interpretation of Article 17.1

(c), when considering whether it is appropriate to imply the words suggested by the

defenders, the court must have regard to the terms of the Article as a whole. If the

various clauses are examined, perhaps the first point which strikes a reader is that clause

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(d) contains an express limitation (“arising ... out of the acts or omissions of the

Contractor or its sub-contractors, suppliers or their respective employees or agents”) of

very much the kind which the defenders ask the court to hold is implied in (c). Hoping

to turn this to their advantage, counsel for the defenders in effect argued that the express

limitation in (d) indicated the scope which the parties had intended that the indemnity

under (c) should have. In my view, however, the fact that the limitation is found

expressly stated in (d) would make any court hesitate before implying a similar

limitation into (c). The obvious objection is that in interpreting any of the clauses in the

Article the court must have regard to the terms of the Article as a whole and, where one

finds that the parties have inserted a limitation in one part and not in another, the court

should readily assume that the difference between the two provisions is deliberate. The

court should not seek to assimilate them by implying words which the parties have not

used - not, at least, unless the provision would make no sense without the words.

In essence counsel for the defenders submitted that the Article would not make

commercial sense unless the indemnity were restricted to the situation where the

Contractor was negligent or in breach of statutory duty. In gauging the strength of that

argument, I find it helpful to examine the other clauses in Article 17.1. The Article itself

provides for an identical indemnity, stated in the opening words of the Article, to be

given by the Contractor in respect of any claim, demand, cause of action, loss, expense

or liability arising by reason of a number of matters which are then set out in the various

clauses (a) to (e) of the Article. Those clauses are all different and all define different

circumstances in which the Contractor is to indemnify the operator, as can be seen even

from a cursory examination of the various heads of indemnity.

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Under (a) the Contractor is to indemnify the operators, say, for any loss of the

operators which arises by reason of some government or other authority claiming that the

Contractor has failed to comply with a particular regulation or with a governmental or

judicial order. During the hearing before us, it was suggested that this might, for

instance, cover the case where the operators suffered loss due to delay arising from the

Contractor requiring to redo work which was said to have been done in contravention of

a relevant regulation or order from a Department of Energy inspector. The indemnity

would apply even if there had been no actual failure by the Contractor, but the relevant

inspector asserted that there had been a failure. It follows, of course, that the indemnity

would cover a situation in which there had been no fault of any kind on the part of the

Contractor.

Under (b) the Contractor is to indemnify the operators for loss etc. arising out of

actual or asserted infringement or improper appropriation or use by the company, the

participants or Contractor of intellectual property of various kinds “originating with the

Contractor, its employees, agents, vendors or sub-contractors and furnished or

communicated to the Company by the Contractor or used by the Contractor in

connection with performance of the Work”, where the company had not specified the

particular intellectual property. Various contingencies are covered, including the

situation where, say, some third party brings proceedings against the operators, alleging

that they have infringed copyright, and the allegation arises out of the use of a design

furnished to the company by the Contractor in connexion with the performance of the

work. Here the basis for the Contractor giving the indemnity is that it has furnished the

design. Nothing is said about fault of any kind on the part of the Contractor. Again it is

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clear that there need have been none, since the operators are entitled to be indemnified

inter alia against any costs due to litigation over an “asserted infringement” - which may

turn out to have been no infringement at all.

Clause (c) can be left on one side for the moment. Clause (d) does, of course,

refer to the acts or omissions of the Contractor or of its sub-contractors or suppliers and

their respective employees or agents. That is hardly surprising, since, unless there were

some such connexion between the Contractor and the injury, death or property damage to

a third party, there would be no perceivable basis upon which the operators could

sensibly require the Contractor to indemnify them.

Clause (e) concerns pollution of any kind which emanates in various ways from

equipment, apparatus, machinery, facilities or other property of the Contractor or its sub-

contractors, suppliers, employees or agents. Again there is no reference to negligence or

breach of statutory duty by the Contractor, but, since the clause refers to the

“contributory negligence” of the operators, counsel for the defenders argued that in this

case also one should imply a limitation to the situation where the emanation was due to

negligence or breach of statutory duty on the part of the Contractor. It is difficult to see

why any such limitation should be implied. It is no more surprising that the Contractor

should agree to indemnify the operators for claims arising out of pollution emanating

from the Contractor’s equipment than that it should agree to indemnify the operators for

claims arising out of infringement of copyright due to the operators’ use of a design

furnished by the Contractor. In the one case the “connecting factor” is the furnishing of

the design by the Contractor, while in the other it is the emanation of the pollution from

the Contractor’s equipment. If claims are brought against the operators in either event,

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these factors are in themselves enough, without the need to introduce any question of

fault on the part of the Contractor, to justify a contractual arrangement whereby the

Contractor agrees to indemnify the operators against the claims.

In summary, when the terms of Article 17.1 (a), (b), (d) and (e) are considered as

a whole, it is apparent that they provide for the Contractor to give an indemnity to the

operators to cover various contingencies, only one of which, (d), involves the act or

omission of the Contractor as being the immediate event giving rise to the claim. Since

the contingencies in the clauses are all distinct, one cannot determine the appropriate

construction of any particular clause by reference to the language of any other clause. In

particular there is no basis for saying that, simply because a limitation is found in (d), the

parties must have intended to imply the same limitation into (c). Moreover, having

noted the various other contingencies in which the Contractor is to indemnify the

operators even although the Contractor is not at fault, I see no reason to suppose that the

Contractor would not have agreed to give an indemnity in a case where, even although

the claim against the operators does not arise out of any act or omission by the

Contractor, either the employees who are injured or killed are the Contractor’s

employees or else the property which is damaged belongs to the Contractor. In the

scheme of the Article as a whole those factors would in themselves provide a sufficient

justification for the Contractor’s agreeing to indemnify the operator.

On the other hand the court should not adopt that construction of the indemnity

unless it is “very clear” from the language used that this is indeed what the parties agreed

in Article 17.1 (c). In the end this must be a matter of impression, but in my view that

interpretation does emerge very clearly from the actual language of the provision,

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especially when its terms are considered in the context of the terms of Article 17.1 as a

whole.

For these reasons, having regard to the terms of the Article alone, I see no proper

basis for implying into clause (c) any restriction of the indemnity to the situation where

the claim arises out of negligence or breach of statutory duty on the part of the

Contractor.

2.5 The Background Context of the Indemnities

That conclusion is fortified when one looks at the general surrounding

circumstances of which all the parties are likely to have been aware. The underlying

basis of the defenders’ argument was that it was implausible to think that the parties

would have intended the Contractor to indemnify the operators for claims by reason of

the death or injury to its employees or damage to its property unless the Contractor had

been negligent or in breach of its statutory duty. If one knew nothing whatever about the

environment in which this contract was intended to operate, that argument might carry

weight. But there was evidence in the case which suggests that the environment was one

in which that assumption would be inappropriate and in which it would indeed have been

in accordance with the practice at the time for the Contractor to agree to give an

indemnity to relieve the operators of liability in the case of the death of, or injury to, the

Contractor’s employees even though the Contractor had not been at fault. The relevant

evidence came from Mr. Crain, the Vice President of Union Texas Ltd. and himself a

lawyer. Speaking of the situation following the disaster, Mr. Crain said:

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“Occidental paid for all their own employees, and normally, in fact

consistently, we expected the Contractors to pay for their employees.

That is the fundamental economics of the business: you take on your

employees and you take the risk for them no matter what happens, and the

Contractors take on their employees and they build into their rates the

insurance associated with that and you pay based on these rates. So we

expected Occidental in this instance to pay for their employees, and they

stepped up and did it; and we expected the Contractors to step up and pay

for their employees and they chose not to, and I guess that is why we are

here today” (Evidence 10/1732 - 1733).

Since it is not disputed that most of the contractors - and all of the contractors who are

concerned in the present proceedings - were not in any way responsible for the disaster

and that no question of their negligence or breach of statutory duty arose, it is plain that

Mr. Crain was indicating that it was fundamental to the economics of the North Sea

operation that the operators were to bear the risk of any claims due to the death of, or

injury to, their employees, while the contractors were to bear the equivalent risk for their

employees, irrespective of whether the contractors were at fault or not.

This evidence is borne out by T. Daintith and G. Willoughby, United Kingdom

Oil and Gas Law (edited by A. Hill, 1998), para. 1-845 where, after referring to

insurance practice, the authors say:

“It is thus normal for the client and the contractor to assume full liability,

and give each other mutual indemnities, for claims arising out of death of

or injury to their own employees and for loss or damage to their own

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property ..., regardless of any negligence or default on the part of the

other party or its employees, agents or sub-contractors.”

The indemnity clauses in the present case appear to me to fall within the general pattern

described by the authors, even although the particular version differs in that the

indemnity does not apply where the casualty is caused by the sole negligence or wilful

misconduct of the operators.

Similarly in D. W. Sharp, Offshore Oil and Gas Insurance (1994), p. 108, under

the heading “Injury or Death of Employees”, the author says:

“The position in respect of employers’ liability is invariably dealt with by

the exchange of mutual indemnities in respect of injuries to or deaths of

employees. There is perhaps a simple reason for this. If an individual is

injured he will expect to have a right to sue any party who may have been

guilty of negligence leading to the circumstances which caused the injury.

This party may be another contractor, the Principal or his employer, or

any combination of all three. The issue can become complicated by

reason of contributory negligence. Determining liability and awarding

costs can be a lengthy process in these circumstances, and this can only

add to the anguish of the injured party, or the dependents [sic] of the

deceased who may have been the sole breadwinner. The employer

therefore accepts a responsibility for his employees and will generally

give the party with whom he is contracting a full indemnity in respect of

any suit or action brought against that other party.”

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Even were the “simple reason” for the phenomenon incorrect, that would not affect the

author’s statement of the phenomenon which he is attempting to explain, viz. that in the

North Sea oil industry the position in respect of employers’ liability for injury or death

of their employees is “invariably” dealt with by the exchange of mutual indemnities.

The argument which then follows is clearly intended to explain why the indemnity is one

under which the employer accepts full responsibility for his employees and generally

gives the party with whom he is contracting a full indemnity in respect of any suit or

action brought against that other party.

We were also referred to the decision of the United States Court of Appeals, Fifth

Circuit, in Fontenot v. Mesa Petroleum Co. 791 F. 2d 1207 (5th Cir. 1986) which

concerned a claim by an employee for injuries which he sustained when he fell while

disembarking from a helicopter during a refuelling stop on an oil rig off the coast of

Louisiana. Brown, Circuit Judge, gave the decision of the court in a colourful judgment

in which he began (at p. 1209) by describing the situation facing the court:

“This case vividly illustrates how, in the complicated offshore drilling

environment with its intricate divisions of responsibility and countless

contractors and subcontractors, a simple slip-and-fall can turn into a

multiparty morass of contribution cross-claims, third- and fourth-party

defendants, reciprocal indemnity agreements, and the ever-popular

warranties of workmanlike performance. The plaintiff in this litigation

has long since settled and departed but the other parties have chosen to

remain on the field of battle to contest the appropriate share of the

plaintiff’s settlement to be borne by each of them.”

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He went on to characterise the case as a “multiparty donnybrook”. The facts are

complex, but the important point for present purposes is that the Fifth Circuit supported

the result which they reached on the effect of a particular indemnity by reference to a

policy analysis which they expounded in these terms (791 F. 2d at p. 1216):

“The purpose of the reciprocal indemnity agreement in the Mesa-

Rowandrill contract, as it is in so many similar oilfield service contracts,

is to divide the responsibility for personal injury/death among the many

employers and contractors according to the identity of the injured

employee rather than according to which party’s fault or negligence

caused the injury. In effect, each party assumes the risk of the other’s

negligence and agrees to be responsible for injuries to its own employees

no matter how, or by whom caused.”

In support of that view the court cited a previous decision of their own and certain

amendments made in 1984 to the federal Longshoremen’s and Harbor Workers’

Compensation Act.

While the circumstances in the present case can obviously be distinguished from

those in Fontenot, the passage is useful as an indication that an appellate court in the

United States has recognised that indemnities in regard to the death of, or injury to,

employees in the context of the oil industry have to be interpreted against the

background of a practice of regulating matters in such a way that the injured person’s

employer shoulders the liability even though he is not at fault. The fact that Fontenot

also shows that these arrangements do not actually put an end to disputes does not detract

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in any way from the fact that the practice is followed - to the benefit of the plaintiff, at

least, in that case.

This decision, the passage from Mr. Crain’s evidence and the excerpts from the

textbooks all demonstrate that there is nothing whatever surprising in the fact that in the

London Bridge contract the Contractor has given an indemnity which, on a

straightforward reading of its terms, is not limited to the situation where it is negligent or

in breach of statutory duty. On the contrary, if interpreted according to its terms, the

indemnity falls into the general pattern which is to be found in this particular industry.

The defenders are therefore asking the court to read into the indemnity clause a

qualification which would mean that in this particular case the parties had adopted a

form of indemnity which was disconform to the normal pattern. In my view the court

should not adopt that construction, but should prefer the construction of the Article

which, on the evidence, parties involved in the oil industry would have intended it to

bear.

Although their terms are not exactly the same as those of the London Bridge

contract, there is nothing in the terms of the Northern Industrial Marine, Stena Offshore

or British Telecom contracts which would lead me to reach a different conclusion as to

the proper construction of their indemnity provisions. The terms of the British Telecom

contract were not stipulated by the pursuers – which, on one view, might be thought to

weaken the argument for construing it against them.

2.6 The Eastman Christensen Contract

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The Eastman Christensen, Wood Group and Kelvin Catering contracts differ

significantly from the contracts which I have examined so far, since in these three the

indemnity clause is divided into two parts. There are certain differences among the three

contracts but, like counsel, I find it convenient to concentrate on Article 15 of the

Eastman Christensen contract:

“15.1 CONTRACTOR’S INDEMNITIES

Contractor shall indemnify, hold harmless and defend the Company and

its parent, subsidiary and affiliate corporations and Participants, and their

respective officers, employees, agents and representatives from and

against any and all suits, actions, legal or administrative proceedings,

claims, demands, damages, liabilities, interest, costs (including but not

limited to the cost of litigation) and expenses of whatsoever kind or nature

whether arising before or after completion of the Work hereunder and in

any manner directly or indirectly caused, occasioned or contributed to in

whole or in part, by reason of omission of [sic] negligence whether active

or passive of Contractor, or of anyone acting under Contractor’s direction,

control or on Contractor’s behalf in connection with or incidental to the

work. Provided always that the Contractor’s total liability arising

pursuant to this indemnity shall not exceed One Million Pounds Sterling

(£1,000,000) per occurrence.

Without prejudice to the foregoing generality, the Contractor shall

indemnify, hold harmless and defend the Company and its parent,

subsidiary and affiliate corporations and Participants, and their respective

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officers, employees, agents and representatives from and against any

claim, demand, cause of action, loss, expense or liability (including but

not limited to the costs of litigation) arising (whether before or after

completion of the Work hereunder) by reason of:-

a. Non-compliance with Laws

Claims by governmental authorities or others of any actual or asserted

failure of the Contractor to comply with any law, ordinance, regulation,

rule or order of any governmental or judicial body; and

b. Intellectual Property Infringement

(Including Patents and Copyrights)

Actual or asserted infringement or improper appropriation or use by the

Company, Participants or Contractor of trade secrets, proprietary

information, know-how, copyright rights (both statutory and non-

statutory), or patented or unpatent [sic] inventions or for actual or alleged

unauthorised imitation of the work of others, arising out of the use of

methods, processes, designs, information or other things originating with

the Contractor, its employees, agents, vendors or sub-contractors, and

furnished or communicated to the Company by the Contractor or used by

the Contractor in connection with performance of the Work and which

have not been specified by the Company; and

c. Injury to Employees and Damage to Property of Contractor

Injury to or death of persons employed by or damage to or loss or

destruction of property of the Contractor or its parent, subsidiary or

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affiliate corporations, or the Contractor’s agents, sub-contractors or

suppliers, irrespective of any contributory negligence, whether active or

passive, of the party to be indemnified, unless such injury, death, damage,

loss or destruction was caused by the sole negligence or wilful

misconduct of the party which would otherwise be indemnified; and

d. Third Party Injury and Property Damage

Injury, death, or property damage, loss or destruction other than such as is

described in Articles 15.1 (c) and 15.2 (a) and (b), and arising directly or

indirectly out of the acts or omissions of the Contractor or its sub-

contractors, suppliers or their respective employees or agents, irrespective

of any contributory negligence, whether active or passive, of the party to

be indemnified, unless such injury, death, damage, loss or destruction was

caused by the sole negligence or wilful misconduct of the party which

would otherwise be indemnified; and

e. Pollution

Waste, debris, rubbish, liquid or non-liquid discharge or pollution of

whatever nature which is dropped, seeped, discharged, spilled, blown out

or leaked from equipment, apparatus, machinery, facilities or other

property of the Contractor or its sub-contractors, suppliers, employees or

agents, irrespective or [sic] any contributory negligence, whether active or

passive, of the party to be indemnified except to the extent that the

foregoing was caused by the sole negligence or wilful misconduct of the

party which would otherwise be indemnified.”

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The most significant point about this Article is indeed that the indemnity clause comes in

two parts. The first has no equivalent in the London Bridge contract, but the second part

is in identical terms to the indemnity in the London Bridge case, except that there is no

limit on the amount of the indemnity in respect of liability to third parties.

The argument for the defenders was that the two parts of the indemnity should be

interpreted together. More particularly, the first paragraph, which the defenders

described as “the preamble”, should be seen as governing and defining the scope of the

indemnities in the second part of the Article. This meant that the qualifications to be

found in the first part were inherent in the indemnities set out in the second part. Two

results in particular followed. First, the indemnities in the second part were subject to

the £1,000,000 limit set out in the proviso at the end of the first part. Secondly, the

indemnities in the second part applied only where the death, injury or damage was

caused or contributed to “by reason of omission or negligence whether active or passive

of the Contractor”. In the context in which it was used in the first paragraph, the term

“omission” could not properly be construed as simply a negligent omission and should,

rather, be construed as referring to a breach of statutory duty by the Contractor. In

summary, the indemnities in the Article were to apply only where the death, injury or

damage was due to breach of statutory duty or negligence on the part of the Contractor.

It is a curiosity - and hence, perhaps, a weakness - of this approach that, if the

defenders’ construction of the indemnity in Article 17.1(c) of the London Bridge

contract is correct and the reference to the contractor’s negligence or breach of statutory

duty is implied into the terms of the indemnity by the reference to the “contributory

negligence” of the party to be indemnified, then in the Eastman Christensen contract

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there is no need to use the terms of the first paragraph to imply those words into clause

(c) of the second paragraph. The argument might, of course, be reversed. Moreover, as

I have just explained, the defenders’ interpretation involves reading the words “by reason

of omission o[r] negligence whether active or passive of Contractor” as being intended to

include a breach of statutory duty by the Contractor. While some breaches of statutory

duty might be easily characterised as omissions, others are of a more positive character

which one would not readily classify in this way. The interpretation therefore appears

somewhat forced, at the margins at least.

On the defenders’ interpretation, the first paragraph of the Article is not a free-

standing indemnity provision, but a provision which sets out qualifications that are to be

imported into the indemnities which follow. Consistently with this approach, counsel for

the defenders were meticulous in always describing this first paragraph as the

“preamble” to what followed. That term, of course, presupposes that the function of the

first paragraph is the one assigned to it by the defenders and, for that reason, I have not

adopted their preferred term and shall use neutral terminology instead.

Article 15.1 is headed up “Contractor’s Indemnities”: the draftsman is

anticipating that more than one indemnity will follow. It is noticeable, however, that

Article 15.2 is headed up “Company’s Indemnities” and is followed by only two clauses

which are equivalent to clauses (c) and (e) under “Contractor’s Indemnities”. The

draftsman must therefore regard the second paragraph of Article 15.1 as itself containing

a number of indemnities - and indeed that is consistent with the way in which I analysed

the equivalent paragraph in Article 17.1 of the London Bridge contract. It follows that

one cannot deduce from the heading of Article 15.1 whether the draftsman regards the

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first paragraph as itself containing an indemnity or merely as a provision defining the

scope of the indemnities in the following paragraph.

On the other hand the proviso to the first paragraph says that the Contractor’s

total liability “pursuant to this indemnity” is not to exceed £1,000,000. The phrase

suggests that, contrary to the defenders’ submission, the draftsman does regard the first

paragraph as itself constituting an indemnity, but one which is limited to £1,000,000.

In advancing their construction, counsel for the defenders placed considerable

weight on the words “Without prejudice to the foregoing generality” which introduce the

second paragraph. Those words tended to suggest, they argued, that what had gone

before in the first paragraph was a generality and that what followed in the second

paragraph was encompassed within, and subject to, that overall generality. The words

also suggested that what followed was not to prejudice what had gone before. The effect

therefore was that the indemnities in the second paragraph were subject to the provisions

of the first paragraph.

I do not consider that the words “Without prejudice to the foregoing generality”

will bear the weight which the defenders seek to place upon them. I accept that the

words suggest that the first paragraph contains a generality and that what follows is not

to prejudice that generality. I do not, however, see any basis for equating the phrase

“Without prejudice to the foregoing generality”, which is what the draftsman actually

inserted in the contract, with another phrase, “Subject to the foregoing generality”, which

the draftsman might have chosen, but did not. Indeed I find nothing in the actual phrase

which points to the particularised indemnities in the second paragraph being made

subject to, and hence being cut down by, the more general provision in the first

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paragraph. The natural reading of the phrase, it appears to me, is that it provides a link

between the paragraphs and indicates that the first paragraph contains a general

indemnity which is not itself to be prejudiced or cut down by the additional, more

particular, indemnities which follow in the second paragraph. On the construction which

I prefer, those particular indemnities do not prejudice the general indemnity: they leave

the operators’ rights under the general indemnity intact but give the operators additional

rights. Moreover, legitimately or not, my conviction that this is how the phrase ought to

be construed in the Eastman Christensen contract is certainly not weakened when I

notice that in the equivalent position in Clause 15.1 of the Wood Group contract the

phrase is “In addition and without prejudice to the foregoing generality”. When

interpreted in the manner which I prefer, the phrase in the Eastman Christensen contract

not only does not support, but actually undermines, the defenders’ argument on the

interpretation of the clause as a whole.

I am conscious, of course, of the difficulties which present themselves if the

paragraphs are read as being quite distinct.

Counsel for the defenders pointed out that, on that approach, the Contractor has

an unlimited liability to indemnify the operators where any of the Contractor’s

employees is injured or killed or where its property is damaged, but has no obligation

under Article 16 to maintain insurance cover for that liability. On the approach which

they advocated, the Contractor is liable to indemnify the operators for the injury to, or

death of, its employees only where there has been an omission or negligence on the part

of the Contractor. Counsel pointed out that under Article 16.2 (i) the Contractor must

maintain Employer’s Liability and Workers’ Compensation Insurance which would

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cover that contingency. Similarly, they said that the Contractor’s liability to indemnify

the operators for claims and losses arising out of third party injury or property damage

would be covered by the General Public Liability Insurance which the Contractor is

obliged to maintain under Article 16.2 (ii). The scope of the insurance provisions could

therefore provide a useful indication of the scope of the indemnity provisions.

The force of the defenders’ argument is substantially weakened by the fact that

there is no direct correspondence between the £1,000,000 limit per occurrence in Article

15.1 and the obligation to maintain a minimum cover of $5,000,000 for each incident

under Article 16.2. I am, moreover, uncertain whether the General Public Liability

Insurance would cover the Contractor for liability arising in all the ways (e.g. by the

negligence of someone acting under the Contractor’s direction) envisaged in Article

15.1. In any event the correlation between the insurance provisions and the scope of the

indemnities in Article 15.2, as construed by the defenders, is not so close as to persuade

me that the insurance provisions are intended to shadow the indemnity provisions

exactly. For that reason I do not find in them any compelling indication that the

indemnity in clause (c) of the second paragraph of Article 15.1 should be qualified in the

manner proposed by the defenders.

The other point which counsel for the defenders emphasised is in some ways

more formidable. On the pursuers’ construction of Article 15, if an employee of the

Contractor were injured due to the negligence of the Contractor but in circumstances

where the employee could bring a claim against the operators, both the indemnity in the

first paragraph and the indemnity in clause (c) of the second paragraph would apply. Yet

the indemnity under the first paragraph would be subject to a limit of £1,000,000 while

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the indemnity under clause (c) of the second paragraph would be subject to no such

limitation. I confess that this is the point which has given me the greatest difficulty.

That difficulty cannot, however, induce me in the end to read into clause (c) in the

second paragraph words which are not there and which are not, I am persuaded, intended

to be there. That being so, I must interpret the provisions as meaning that, where a

particular claim or loss falls within the scope of one of the clauses in the second

paragraph, the Contractor is obliged to indemnify the operators to an unlimited extent;

where, on the other hand, the claim or loss does not fall within any of the clauses in the

second paragraph, but is covered by the first paragraph, the Contractor is obliged to

indemnify the operators, but only up to a maximum of £1,000,000.

That interpretation can, of course, be criticised on the grounds that it reduces the

first paragraph to the status of a sweep-up provision and it is somewhat unusual to find a

sweep-up provision placed ahead of the provisions to which it provides the back-up.

Moreover, the range of the indemnities in the second paragraph is so extensive as

apparently to leave little room for the indemnity in the first paragraph to operate. If the

construction of the clause which I have adopted is correct, these must just be accepted as

possible criticisms of its drafting. The draftsmanship of the contract as a whole is not so

surpassingly perfect as to convince me, at least, that criticism of that kind could never be

merited and that the construction must therefore be incorrect. More positively, perhaps,

the scheme of the indemnities so interpreted may appear rational and even commercially

sensible: unlimited indemnities against claims and losses which the parties can identify

with some precision, coupled with a capped indemnity for claims and losses which they

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cannot so specify and the potential extent of which may also, therefore, be hard to

identify and predict.

For all these reasons I reject the defenders’ arguments as to the construction of

Clause 15.1 of the Eastman Christensen contract. The Kelvin Catering and Wood Group

contracts, though not in all respects identical with the Eastman Christensen contract, both

have the two-paragraph structure. I therefore interpret them in the same way as the

Eastman Christensen contract - indeed, as I have pointed out, the linking phrase in the

Wood Group contract strengthens the case for that interpretation.

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3. CONSEQUENTIAL LOSSES

In the present actions the pursuers call upon the defenders to indemnify them

against the claims, or more exactly the losses arising from the claims, which were

brought against them in respect of the employees of the various defenders who had been

either killed or injured in the disaster. The pursuers settled the claims at a level which

was higher than would have been appropriate if the claims had been considered purely

within a Scottish or United Kingdom context. This was because, having taken advice,

the pursuers concluded that they were potentially vulnerable to the jurisdiction of the

courts of Texas where any claims would have been heard by a jury. The Lord Ordinary

who heard a large amount of evidence on the point concluded that the pursuers were

“very vulnerable to litigation in Texas” (Opinion 6/1297). In reaching this view the

Lord Ordinary attached particular importance to the fact that, for several years, the

pursuers had been “selling the whole of their [oil] production through and under the

control of agents in Texas” (Opinion 4/1295). The agents, OCSI, were “the nerve centre

of OPCAL’s crude oil sales and OPCAL made the choice to sell all their oil” through

them (Opinion 4/1296). The pursuers did not ask us to review these findings of the Lord

Ordinary.

Having concluded that the pursuers would have been very vulnerable to litigation

in Texas, the Lord Ordinary went on to consider the settlements which the pursuers had

reached with the agents acting for the claimants. He expressed his view in this way:

“A detailed consideration of the circumstance of this case has convinced

me that the settlement arrangements were reasonable. Put at the very

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lowest I think it was not seriously contested that there was some risk that

the plaintiffs could have secured the jurisdiction of the Texas Court, that

an eventual award of damages was likely and that the sums awarded

would have been somewhere above Scottish values” (Opinion 6/1420).

In this reclaiming motion the defenders have not challenged the Lord Ordinary’s finding

that the settlements were reasonable and we are accordingly entitled to proceed on the

basis that they were. But, although he was satisfied that the settlements were reasonable,

the Lord Ordinary nevertheless went on to hold that, even if the pursuers had been

entitled to be indemnified by the defenders, the indemnity would have been limited to

the amount of the losses which would have been recoverable under Scots law. In other

words he held that they would not have been entitled to be indemnified for the additional

sums which they paid to the claimants because of the risk of proceedings in Texas.

The Lord Ordinary reached this view on the basis of his interpretation of the

terms of the consequential loss provision, a version of which is to be found in all the

contracts between the pursuers and the defenders, except in the Stena Offshore contract.

For the sake of consistency I have selected Article 20 of the London Bridge contract

which is in these terms:

“CONSEQUENTIAL LOSS

Notwithstanding any provision herein to the contrary, in no event shall

either the Contractor or the Company be liable to the other for any

indirect or consequential losses suffered, including but not limited to, loss

of use, loss of profits, loss of production or business interruption.”

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The Lord Ordinary held that this provision meant that the defenders’ obligation to

indemnify the pursuers was limited: they were not liable to indemnify them for “any

indirect or consequential losses” which the pursuers suffered. The Lord Ordinary was

addressed at length on the construction of this phrase and he expressed his conclusion in

this way:

“The terms indirect and consequential loss are almost terms of art. Since

at least Koufos they have a clear meaning in relation to damages for

breach of contract. There are at least a number of cases where judges

have gone to breach of contract cases to acquire a meaning for the

expression being considered even in cases which are not themselves

damages cases for breach of contract. The views of Mr. Justice Megaw in

Wraight Ltd illustrate such an approach. Thus to put it no higher if at

least there is a possibility from the terms of the Contracts that the parties

were using the phrase ‘indirect and consequential loss’ as its meaning was

developed in cases such as Koufos then the defenders would be entitled to

the benefit of that construction. I think that the phrase we are considering

is open to the construction in question. Indeed it is difficult to find a

construction more apt in relation to the terms of the contracts” (Opinion

5/1069 - 1070).

What the Lord Ordinary did in this passage was to interpret the phrase “indirect and

consequential loss”. As counsel for the pursuers pointed out in the course of the

reclaiming motion, that particular phrase occurs only in the B.T. contract; in the other

contracts the phrase is “indirect and consequential losses”. Be that as it may, the Lord

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Ordinary in effect accepted the argument which the defenders advanced before him to

the effect that the words “indirect and consequential losses” have acquired a special,

technical meaning. The argument was that those words were to be interpreted as

referring to losses which would be regarded as indirect or consequential under the rules

in Hadley v. Baxendale (1854) 9 Exch. 341 and subsequent cases, including the decision

of the House of Lords in Koufos v. Czarnikow Ltd. [1969] 1 A.C. 350. In particular the

Lord Ordinary attached importance to Lord Reid’s view in Koufos that loss would be

recoverable only if it would “have appeared to the defendant, had he thought about it, to

have a very substantial degree of probability” ([1969] 1 A.C. at p. 388 F - G).

The Lord Ordinary examined the basis on which jurisdiction might have been

established against the pursuers in Texas and held that he

“could confidently conclude that the Contractors would not be aware of

OPCAL’s sales arrangements in Texas. This does not seem to have been

something that they broadcast. Even their attorney Mr. Silva who had

acted for them for years only found out about the sales’ arrangements

some time into the settlement negotiations. Thus I think the loss involved

in Texas enhancement of damages is of a type well beyond what the

Contractors were thinking about when they entered into their Contracts”

(Opinion 5/1072 - 1073).

In summary his conclusion was that

“if the pursuers other than i[n] Stena Offshore were successful in proving

their right to recover under the Contractors’ Indemnity I would award

them only Scottish levels of loss. This is because I consider that it [was]

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an unusual and very material circumstance unlikely to be [ ]known to the

relevant Contractors that not only do OPCAL conduct their business

operation in the North Sea but that they control all their oil sales through

Texas. That OPCAL should purchase goods in Texas and have

contractual arrangements there is perfectly predictable in the oil world but

that they should actually conduct part of their business there is much less

foreseeable” (Opinion 5/1074).

The Lord Ordinary’s decision on this point is ultimately based on his view that

under Article 20 the contractors are obliged to indemnify the pursuers only for losses

which would, in the words of Lord Reid, have been within their contemplation as

“having a very substantial degree of probability” of occurring. Before us, counsel for the

pursuers argued that this approach was mistaken and that, if entitled to recover under the

indemnities, the pursuers are entitled to recover the whole amount which they paid to

effect a reasonable settlement with the claimants.

I did not understand counsel for the pursuers to dispute that Article 20 did indeed

apply to the indemnities in Article 17.1. What they disputed was the interpretation of

Article 20 which the Lord Ordinary had adopted and the effect which he had given to

that interpretation. In so far as Article 20 applies to the indemnities in Article 17.1, it

must operate within the framework of the indemnities contained in that Article - in

particular, for present purposes, the indemnity in paragraph (c). I therefore find it useful

to recall the relevant words of that provision:

“The Contractor shall indemnify, hold harmless and defend the

Company ... from and against any claim demand, cause of action, loss,

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expense or liability (including but not limited to the costs of litigation)

arising ... by reason of ... (c) Injury to or death of persons employed by ...

the Contractor ...”

Two points stand out.

The first is that the indemnity against legal claims and against losses arising from

such claims falls squarely within the terms of the provision. Moreover, the parties have

not agreed - as they might have, of course - to confine the indemnity to claims of any

particular type or to claims arising in any particular jurisdiction or group of jurisdictions;

it applies to “any claim”.

Secondly, while the Contractor is obliged to indemnify the operators against

“loss” and against loss which the operators incur as a result of a claim, the obligation is

actually wider than that. The Contractor is obliged to defend the operators against any

claim arising out of injury to, or death of, the Contractor’s employees. That obligation

means what it says: the operators when faced with a claim can call on the Contractor to

defend the operators against it. Since that obligation is not confined to any particular

class of claims, it applies generally. Therefore, if the pursuers had been sued in respect

of injuries to the contractors’ employees in the courts in Texas, they could have called

upon the contractors to defend them against those claims and the contractors would have

been obliged to do so. That obligation to defend the pursuers against the claims would

have applied, irrespective of whether the plaintiffs established jurisdiction in Texas on

the basis of the pursuers’ oil sales through OCSI there or on any other basis and

irrespective of the amount of damages which the plaintiffs sought in the Texas actions.

There is nothing in the wording of the indemnity which would give the contractors any

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basis for arguing, say, that their obligation to defend the pursuers against a claim

extended no further than an obligation to defend them against the claim up to a value

quantified on a Scottish as opposed to a Texan basis. Nor indeed can I see any basis

upon which the contractors could seek to introduce that qualification since the argument

that their liability is limited depends on the terms of Article 20 which refers only to

“loss” and cannot be read as applying to the separate obligation under the indemnity to

defend the operators against a claim.

I therefore construe the indemnity as involving an unqualified obligation by the

contractors to defend the pursuers against claims arising out of injury to, or death of, the

contractors’ employees. The structure of the Article suggests moreover that the

obligation to defend and the obligations to indemnify and to hold harmless are different

aspects of the same obligation. The Article envisages that the operators, if faced with a

claim, can call upon the Contractor to defend them against the claim and, if the

Contractor is successful in that defence, it has thereby fulfilled its obligation under the

contract. If on the other hand the Contractor undertakes the defence of the operators but

fails and they are found liable in the action, then the Contractor must indemnify the

operators against the loss which they incur as a result of that liability. The argument for

the defenders implies, however, that the obligation to defend against a claim is

potentially wider than the obligation to indemnify against the loss incurred by reason of

a claim. In other words, the unqualified obligation to defend any claim would be

matched by a qualified obligation to indemnify the operators only against the amount of

loss from that claim which the Contractor could have contemplated as having “a very

substantial degree of probability” (Lord Reid in Koufos [1969] 1 A.C. at p. 388 F - G). I

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can see no rational basis upon which the parties should have intended to impose on the

Contractor an obligation to defend the operators against claims in respect of which the

Contractor was not also obliged to indemnify them if they had to pay the claim. Since

that is the implausible result of the construction of Article 20 adopted by the defenders,

for that reason alone I would reject that construction.

The defenders’ argument must be examined more closely, however. As I have

explained, it starts from the proposition that by using the phrase “indirect or

consequential losses” the parties have imported into Article 20 a reference to the test in

Hadley v. Baxendale and subsequent cases. In its original setting that test is supposed to

reflect the intention of the parties to a contract as to the liability in damages which a

party in breach of the contract should owe to the party who suffers loss as a result of that

breach. As the cases show, the test is not always easy to apply even in that context. In

drawing up the provisions in the service contracts with which we are concerned, and in

particular Articles 17.1 and 20 of those contracts, the parties were not seeking, however,

to regulate their liability in the event of a breach of the contracts. Rather, they were

seeking to define the scope of the strict contractual liability of the contractors to

indemnify the operators in certain eventualities. For my part I should find it a priori

somewhat surprising if the parties had chosen to define the scope of that obligation by

importing a test designed to deal with a completely different situation, where a party in

breach has to make good the loss caused by that breach.

In any event the argument for the defenders depends critically on the court

concluding that the parties intended the phrase “indirect or consequential losses” to be

interpreted in a particular way. The interpretation was said to have been established by

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the courts in a number of cases to which we were referred: Millar’s Machinery Co. Ltd.

v. David Way & Son (1934) 40 Com. Cas. 204; Saint Line Ltd. v. Richardsons,

Westgarth & Company Ltd. [1940] 2 K.B. 99; Croudace Construction Ltd. v. Cawoods

Concrete Products Ltd. [1978] 2 Lloyd’s Rep. 55 and British Sugar plc v. N E I Power

Projects Ltd. (1997) 87 B.L.R. 42. I accept, of course, that, where a particular phrase

has been interpreted by the courts and is subsequently used in a commercial document, it

will often be proper to apply the earlier interpretation - on the basis that the parties and

their advisers will have chosen the phrase, conscious of the authoritative interpretation

which has already been placed upon it. That principle of interpretation is amply

illustrated by the cases to which we were referred. And if the words in those cases had

been used in Article 20 and had been used in a context which cast no light on their

intended meaning, there might have been much to be said for applying the settled

interpretation to the Article. But, in fact, those cases are not concerned with the exact

phrase which we are called on to interpret in this case: the phrase in Millar’s Machinery

was “consequential damages”, in Saint Line “indirect or consequential damages”, in

Croudace “indirect or consequential damage” and in British Sugar “consequential loss”.

More importantly, the phrases did not occur in the same type of context as is found in

Article 20.

It is trite that words and phrases used in a contract must be interpreted in their

particular context. That context may provide a key to the interpretation of the word or

phrase and show that, whatever meaning it might bear elsewhere, in the provision in

question it bears a particular meaning which can be derived from its context. Since I

have formed the view that the meaning of the phrase “indirect or consequential losses” is

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best ascertained from the terms of Article 20 itself, I have not found it either necessary

or helpful to analyse the cases on remoteness of damage in contract to which we were

referred by counsel. I concentrate instead on the terms of Article 20 and their

application in the present circumstances.

In Article 20 the phrase “indirect or consequential losses” does not stand alone

but in conjunction with examples of the kinds of losses to the operators which it is said

to include and which therefore must fall within its scope. Since we are concerned to

discover how Article 20 affects the operation of the indemnity in Article 17.1, the two

provisions must be considered together. In that context, all the losses enumerated in

Article 20 are losses which the operators suffer as a result of the injury to, or death of,

the Contractor’s employees or as a result of damage to, or loss or destruction of, the

Contractor’s property. In that sense they are all examples of a situation where A suffers

losses because of injury or damage to B: the losses which A suffers in such

circumstances are indirect or consequential. The genus “indirect or consequential losses”

in Article 20 therefore comprises losses suffered by the operators because of the injuries

to, or deaths of, the Contractor’s employees or because of damage to, or loss or

destruction of, the Contractor’s property: the losses enumerated in the Article are simply

species of loss falling within that genus.

In this respect the operators are like the master in Allan v. Barclay (1864) 2 M.

873 whose servant was injured by the defender. As a result of the servant being injured,

he was unable to work and the master lost his services. Lord Kinloch held that, in a

delictal action, the master could not recover his loss because it had not arisen “naturally

and directly” out of the wrong done. In much the same way, the operators’ loss of use,

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loss of profits, loss of production or business interruption does not arise naturally and

directly out of the injury to, or death of, the Contractor’s employee or out of the damage

to, or loss or destruction of, the Contractor’s property. Rather, the operators’ loss is

secondary or indirect, a “knock-on” loss, arising out of the consequences which flow to

them due to their relationship with the Contractor affected. For instance, the death of an

employee of a Contractor may mean that equipment cannot be brought into service and

the operators may suffer loss of oil production. This is an indirect loss to the operators

arising out of the death of the Contractor’s employee.

By contrast – turning to the actual facts of this case - the loss which the pursuers

suffer if they are sued or have to pay damages because of their statutory or common law

liability for the death of, or injury to, an employee of any particular contractor is a direct

loss to the pursuers themselves rather than an indirect or consequential loss flowing from

a loss experienced by anyone else. That remains the character of the pursuers’ loss,

whatever the quantification of the claim may turn out to be. In no sense was the Texas

enhancement element in the claims against the pursuers an indirect or consequential loss

to them within the meaning of Article 20.

For these reasons I am satisfied that Article 20 does not have the effect of

limiting the defenders’ liability under the indemnity so as to exclude from its scope the

reasonable sums which the pursuers paid over and above the Scottish level of damages. I

should therefore allow the pursuers’ reclaiming motion on this point.

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4. SCOTTISH LEVEL OF DAMAGES

The defenders advanced a further short argument based on the steps taken to

complete the settlement of the claims which the victims and their relatives had brought

against the pursuers. There was really no dispute about what had happened. A general

account of the events which followed the disaster can be found in the “Summary and

Background” at the start of Lord Coulsfield’s opinion. He gives an account of the

submissions of the parties on the present point in Part 6(a).

In presenting the defenders’ argument, Mr. Currie, Q.C., took as his example the

case of the late Mr. Robert Carroll, an employee of London Bridge Engineering Ltd.

Very shortly after the disaster the claimants, including Mr. Carroll’s widow, both as an

individual and on behalf of their daugher, Ashleigh, sought legal advice. The solicitors

representing many of the claimants joined together to form “The Piper Alpha Disaster

Group”. The pursuers’ lawyers entered into negotiations with them, the first meeting

being held on 21 July 1988. A series of meetings followed - on 22 July, 24 August and

16 September. On 16 September information was provided about 30 claimants. In those

discussions the Disaster Group claimed that the pursuers were liable to pay damages to

the claimants and indicated that they would seek to found jurisdiction in the state of

Texas where, they said, the level of damages would be considerably higher than any

awards made by a Scottish court. The pursuers accepted the advice that it was likely that

they would be found liable, if sued in England or Scotland. They were also advised that

there was a material risk of jurisdiction being established against them in Texas. They

therefore accepted the advice that they were likely to be found liable to the claimants and

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as to the risk of jurisdiction being established in Texas. The pursuers therefore took

steps to settle the claims on a basis which allowed for the possibility of jurisdiction being

established in Texas.

The pursuers’ advisers kept the contractors and their representatives informed of

the progress of negotiations. The first letter from the agents for any of the contractors

was dated 10 October 1988. It came from Simpson & Marwick W.S., acting as agents

for Stena Offshore (Northern Coasters) Ltd. The letter was addressed to Mr. David of

Occidental Petroleum (Caledonia) Limited and in it Simpson & Marwick indicated that

their clients understood the pursuers’ desire to achieve settlement without recourse to

litigation. They added:

“It is further recognised that the level of settlement that can realistically

be achieved will exceed the level of damages likely to be awarded in a

Scottish Court and accordingly that the settlement should reflect a

premium on that level.

In those circumstances our clients have no objection to you proceeding to

negotiate settlement of the various claims on such a basis and further are

willing to consider the level of settlement proposed in each case with a

view to confirming whether or not it is reasonable. No guarantee is given

that such confirmation will be forthcoming. Any settlement should be

accompanied by a worldwide discharge and a Statutory Declaration of

Satisfaction to provide full protection for this company in a form which

has been approved by us...

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This letter is written without prejudice to our client’s right to contest any

claim for relief that you may subsequently make in contract or otherwise

which is expressly reserved, nor should it be interpreted as agreeing that

any such claim exists.”

Three days later the same agents wrote to Messrs. Ince & Co., the London agents

for the pursuers, on behalf of the Piper Alpha Insurers Committee, following a meeting

with Ince & Co. on 12 October 1988. In the letter they said inter alia:

“The Committee has considered Occidental’s proposals to settle the

claims of relatives and dependents [sic] on the basis of a multiplier of 2.5

on the dependency element and a multiplier of 12 on the solatium element

both over the basic Scottish levels.

After consideration is given to the exposure to U.S. litigation, its awards

and penalties and the risks and commercial pressures to which Occidental

find themselves subject it is recognised that the settlement proposals are

reasonable for Occidental. However, the same exposure, risks and

pressures do not, in the Committee’s view, apply to the contractors.

Accordingly the Committee cannot give you the reassurance that you seek

that quantum will not be a matter of future dispute.”

Thereafter by letter dated 18 October 1988 Paull & Williamsons made an initial

offer to settle to the agents acting for Mrs. Carroll and Ashleigh. The offer, in a revised

form, was renewed in a letter of 2 May 1989. In its revised form the offer was to pay a

total sum of £683,853.72, with interest from 17 April 1989. The sum was to be

apportioned between Mrs. Carroll and her daughter in accordance with a procedure set

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out in a Memorandum annexed to the letter. Mrs. Carroll accepted the offer, as an

individual and as tutrix of Ashleigh, on 30 May 1989.

On 9 August 1989 Mrs. Carroll, again as an individual and as tutrix to her

daughter, signed an elaborate document whose title gives an indication of its far-reaching

effect:

“Full Release of all Claims and Demands

Assignment, Covenant not to Sue and Indemnification

Agreement in Favour of Released Parties”.

In broad terms the effect of the document was that, in return for the sum agreed to settle

the claims, Mrs. Carroll, as an individual and tutrix, released the pursuers from all

claims, including claims in other jurisdictions. She undertook that

“As and for the same consideration referred to herein, the Claimants

consent and direct their Solicitors / Attorneys to institute proceedings in

the Court of Session in Edinburgh which will result in an entry of a

decree for payment, it being understood that this equates to a dismissal

with prejudice of all claims and actions which may have been brought on

their individual or collective behalf in any court, anywhere, arising out of

the Accident, personal injury and death of the Decedent.”

She further agreed that the release could be pleaded

“as an absolute and final bar to any and all suits which may hereafter be

brought and maintained by him or her, or anyone claiming by or through

him or her.”

She went on to agree to indemnify the pursuers against any claims etc.

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“accruing to or on behalf of him or her or anyone claiming by or through

him or her, arising out of the accident, personal injury and death of the

Decedent.”

In accordance with the procedure envisaged in this document, on 21 September

1989 the agents acting on behalf of Mrs. Carroll and her daughter signetted a summons

in an action of reparation against the pursuers in the Court of Session. The summons

contained two conclusions for £683,853.72, one for payment to Mrs. Carroll as an

individual and the other for payment to Mrs. Carroll as tutrix of her daughter. Actions of

this kind were referred to in the proceedings before us as “confirming actions” and they

were raised to meet the demands of the pursuers’ American legal advisers who

considered them to be a necessary step in protecting the pursuers from the risk that any

of the claimants, having settled their claims against the pursuers in Scotland, might try to

raise proceedings elsewhere, in particular in courts in the United States. In cases, such as

the Carroll case, where one of the claimants was a pupil or minor, another purpose of

raising the action was to have a curator ad litem appointed by the court to look after the

interests of the child and to consider the terms of any proposed settlement from that point

of view. This procedure protected not only the child but also the pursuers since it was

designed to ensure that any discharge of the pursuers’ liability on behalf of the child

would be final and not liable to be re-opened. Once the curator was appointed, the case

was sisted to await the outcome of an arbitration to determine the appropriate

apportionment of the sum of damages to be awarded to Mrs. Carroll as an individual and

as tutrix for her daughter. The terms of the confirming actions were approved by the

pursuers’ legal advisers and the actions were not defended.

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In due course, once the apportionment had been finalised, a Joint Minute was

lodged, the signatories being the counsel representing Mrs. Carroll, the curator ad litem

and the pursuers. The terms of the Joint Minute gave effect to the arbiter’s

apportionment of the award of damages between Mrs. Carroll and her daughter: Mrs.

Carroll was to be paid £517,853.72 and her daughter was to be paid £166,000, with

interest from 17 April 1989. On 18 April 1990 decree was pronounced in terms of the

Joint Minute and the decree was extracted on 26 April 1990.

On 2 May 1990 the underwriters sent two cheques to the pursuers’ agents, Paull

& Williamsons, for distribution to Mrs. Carroll’s agents. One of the cheques covered the

agents’ fees and the other was for £781,944.57, which represented the principal sum of

£683,853.72 with the accrued interest. By letter dated 3 May 1990 Paull & Williamsons

forwarded the cheques to the Carrolls’ agents, thus giving effect to the settlement.

In presenting the argument for the defenders, Mr. Currie drew attention once

more to the terms of the indemnity provision. The example which he took was Article

17.1 in the London Bridge contract which begins:

“The Contractor shall indemnify, hold harmless and defend the Company,

and its parent, subsidiary and affiliate corporations and Participants, and

their respective officers, employees, agents and representatives from and

against any claim, demand, cause of action, loss, expense or liability

(including but not limited to the costs of litigation) arising”

out of the event in question.

Mr. Currie argued that the pursuers had to identify the head under which they

sought indemnity. In the course of submissions before the Lord Ordinary, he said, Mr.

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MacAulay, Q.C., had indicated that the pursuers were seeking indemnity from and

against the “claims” brought against them by the claimants. But that submission

overlooked the fact that, for what might have been good reasons, the pursuers had chosen

to settle the claims in a particular way. That particular way had involved, as one of its

essential components, the claimants raising proceedings in the Court of Session and

decree being pronounced against the pursuers in those proceedings. The effect of that

decree was to supersede and extinguish any of the claimants’ claims on which the

relevant action in the Court of Session had been based. It followed that the pursuers

could not thereafter seek indemnity for loss due to any such claims, since they had all

been extinguished. Following the Court of Session decree, the only basis upon which the

pursuers could seek indemnity was in respect of their “liability” under that decree which

was governed by Scots law. A decree of a Scottish court could only be in respect of

damages which fell to be awarded in terms of Scots law. Ex hypothesi any element in

the settlement of the claimants’ claims which was referable to possible exposure to

liability in Texas was not an element to which the claimants would be entitled under

Scots law. The pursuers should accordingly be entitled to recover nothing more under

the indemnity than the amount which they would have been liable to pay as damages

calculated according to Scots law and without reference to any possible exposure to

claims in other jurisdictions.

Despite the elegant manner in which Mr. Currie presented his argument, it failed

to persuade me. I accept his submission as to the effect of the decree of the Court of

Session on the underlying claims. Before the final decree was pronounced on 18 April

1990, the claimants had illiquid delictal and other claims against the pursuers. In so far

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as those claims were the subject of the proceedings in the Court of Session, the final

decree extinguished those rights and transformed the claimants’ rights into rights to

payment of the ascertained and liquid debts constituted by the Court of Session decree.

See Freeman v. Lockyer (1877) 4 R. (H.L.) 32 at p. 40 per Lord Selborne and Comex

Houlder Diving Co. Ltd. v. Colne Fishing Co. Ltd. 1987 S.C. (H.L.) 85 at p. 121 per

Lord Keith of Kinkel.

Even so, it does not seem to me to follow that, if the pursuers seek to recover

from the contractors under the indemnity the sum for which they (the pursuers) were

found liable to the claimants in the decree and which they duly paid in terms of the

decree, they are confined in the manner suggested by Mr. Currie. In my view, by paying

the sum for which they were found liable in the action arising out of the death of

Mr. Carroll in the disaster, the pursuers suffered a loss “arising ... by reason of ... injury

to or death of [a person] employed by ... the Contractor ....” Other things being equal,

therefore, the pursuers are entitled to an indemnity for that loss from the contractors who

employed Mr. Carroll. In much the same way, it appears to me that, even though decree

has been pronounced in respect of the claimants’ claim and the claim has thereby been

extinguished, the sum paid in terms of that decree can properly be thought of as a sum

paid in respect of the claim. Accordingly, the pursuers can seek indemnity for that sum

as a sum which they have paid in respect of a claim “arising ... by reason of ... injury to

or death of [a person] employed by the Contractor ....” I therefore reject the basic

premise of the respondents’ argument, that the pursuers can seek indemnity only for their

“liability” as established by the decree against them.

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For the sake of examining the argument fully, however, I assume that I am wrong

to reject the premise of the defenders’ argument. I therefore start from the basis that the

pursuers are seeking indemnity simply by reference to their “liability” under the Court of

Session decree. The defenders then argue that they are entitled to challenge the quantum

of the pursuers’ right to be indemnified. They accordingly submit that, because the

defenders’ alleged obligation to indemnify arises out of the pursuers’ liability under a

decree pronounced by a Scottish court, we should go behind that decree, examine it to

discover what proportion of the sum awarded would have been awarded by reference to

Scots law only, and then declare that any amount over that sum is excessive. In this way

we would confine the defenders’ liability under the indemnity to the Scottish level of

damages only and exclude the Texas enhancement. This stage of the argument appears

to me to be as difficult as the first.

We know that the actions raised by the claimants in all these cases were

“confirming actions”. They were not contested and a Joint Minute was lodged, in terms

of which decree was pronounced. In that situation the judge pronouncing decree will not

have gone behind the terms of the Joint Minute and will have pronounced decree in

terms of the Joint Minute. Provided that the sum for which he is asked to pronounce

decree is within the ambit of the conclusion or conclusions - as was the case here -

neither the judge nor any other element in the court system will scrutinise the matter

further before decree is pronounced. That being so, it appears to me to be wholly

artificial to say that, just because the decree was pronounced by a Scottish court, it could

only properly be for a sum which the court would have awarded by the application of

Scots law to the case. In actual fact many decrees must be pronounced for sums which

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the judge would not have awarded under Scots law if the case had been fought to a

finish. That is in the very nature of settlements, which parties may reach for a variety of

reasons - whether because of the desire of employers to be generous to an outstanding

employee who has been injured, or because of a desire to avoid unwelcome scrutiny of

working practices, or because of a desire to avoid publicity, or because of a deal done by

insurers and trade unions to settle a number of cases on a particular basis. In any of

these situations the decree following on the Joint Minute is a perfectly valid decree of the

Scottish court, whatever the motives for the settlement may have been. Among the

many pressures on the pursuers to settle the claims arising out of the Piper Alpha disaster

was the risk that they would be exposed to proceedings in Texas or some other American

jurisdiction with higher levels of damages. That risk was undoubtedly a factor which

influenced the pursuers, their insurers and their advisers and its effect was to increase the

bargaining power of the claimants and their representatives. Since a decree of a Scottish

court was a necessary part of the pursuers’ strategy to avoid the risk of American

proceedings, the result was an increase in the potential settlement value of the claimants’

Scottish claims. In these circumstances the claimants and the pursuers eventually settled

the claims at a figure which reflected the enhanced value of those claims. The claimants’

representatives then raised actions which were so framed as to allow the Court of Session

to pronounce decree for those sums. As it was entitled - and indeed bound - under Scots

law to do, the court pronounced decree for the agreed sums in terms of the Joint Minute

of the parties. In that situation I can see no basis for saying that, just because the decree

pronounced by the Court of Session was for a sum which was higher than the Scottish

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court would have awarded if the case had gone to proof, the decree should be regarded as

being ipso facto excessive.

Before the Lord Ordinary the pursuers appear, for the most part, to have accepted

that they could not recover what they had paid to the claimants unless the sums were

reasonable. That was also, as I understood the submissions advanced by Mr. Hofford,

their position before this court. As they said in their written response to the written

submissions of the contractors, “The true Question for the Court was whether the

settlements were reasonable in the circumstances”. On the other hand, the Lord

Ordinary (Opinion 5/979 - 982) records and deals with a submission which the pursuers

advanced before him based on Halsbury’s Laws of England (4th edition), para. 354 and

certain cases cited there. These cases might tend to suggest that, where, as here, an

indemnifier is notified of claims or proceedings against the party to be indemnified and

does not defend them, he is thereafter estopped or personally barred from denying the

reasonableness of any settlement of those claims or proceedings. In a considered obiter

passage in Ben Shipping Co. Ltd. (Pte) v. An Board Bainne [1986] 2 Lloyd’s (“The

C. Joyce”) Rep. 285, Bingham J. cast doubt on the application of that estoppel, at least in

a case where there was no express indemnity clause. On one view, in the present case

the personal bar argument might have played an exceedingly important role. If the

contractors had indeed been personally barred from challenging the reasonableness of the

settlements as between the pursuers and the claimants and of the resulting decrees, then

that might have limited the scope of the arguments which the contractors could have

advanced in defence of a claim by the pursuers to be indemnified for the sums which

were paid to meet the pursuers’ liabilities under those decrees. Plainly, of course, issues

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of fact would have a bearing on any such argument. Since, however, counsel for the

pursuers advanced no submission along those lines before this court, the question does

not arise for decision and I express no view on it.

In summary, I hold that the fact that a Court of Session decree passed against the

pursuers in actions relating to the claimants’ claims is not in itself a reason for saying

that the measure of any liability of the contractors to indemnify the pursuers is restricted

to the amount for which the pursuers would have been found liable in damages by a

Scottish court. Despite the existence of the Court of Session decree, the pursuers are

entitled to recover the amount at which they settled the claims, being the amount for

which decree was granted, if the settlement was reasonable in the circumstances.

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5. GOVERNING LAW CLAUSE

Mr. Currie advanced a further argument, summarised in Part 6(b) of Lord

Coulsfield’s opinion, based this time on the terms of the Governing Law clause which is

the same in all of the contracts. Article 5 of the London Bridge contract may serve as an

example:

“GOVERNING LAW

This Contract shall be governed by, construed and interpreted exclusively

according to Scots Law. The parties agree to submission to the

jurisdiction of the Courts of Scotland to the exclusion of the Laws and

Courts of any other country.”

Mr. Currie submitted that, in view of the terms of this Article, as a matter of general law,

et separatim as a matter of the proper construction of the contract, the pursuers were

entitled to recover only Scottish levels of damages under the indemnity. This argument

complemented the arguments which the defenders had advanced under reference to the

Consequential Loss provisions in the contracts and under reference to the decrees which

had been pronounced by the Court of Session. I have dealt with those arguments in Parts

3 and 4 of this opinion.

Mr. Currie drew attention to the fact that, in terms of Article 5 and the equivalent

articles in the other contracts, the jurisdiction of the Scottish courts was exclusive. This

meant that the only courts which were competent to decide any issue relating to the

contractors’ liability to indemnify the pursuers under their contracts were the Scottish

courts. So, even if claimants had sued the pursuers, say, in the courts in Texas, the

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pursuers would have been unable to convene the contractors as third parties in those

proceedings in Texas. In his submission, this was very significant since it meant that the

quantification of any amount for which the contractors would be liable to indemnify the

pursuers was reserved to the Scottish courts. In quantifying that liability the Scottish

courts could apply only their own law, the lex fori. In support of this proposition Mr.

Currie referred generally to A. E. Anton, Private International Law (2nd ed., 1990), pp.

749 et seq. This meant that the pursuers could not come to a Scottish court and ask it to

hold that the contractors were liable to indemnify the pursuers because they had been

found liable to pay a sum which could be regarded as reasonable only if it were judged

by reference to foreign law, viz. the law of Texas.

The Lord Ordinary had been asked to carry out an exercise which no Scottish

judge had ever before been asked to perform: to decide what a foreign court would have

awarded as damages for the injuries suffered by the injured employees or for the deaths

of the claimants’ relatives. Not only did this involve the Lord Ordinary reaching a view

on various imponderable points, but the effect of the exercise was that the Lord Ordinary

came to quantify the contractors’ liability under the indemnity not by reference to the lex

fori, but by reference to foreign law. The Lord Ordinary had thereby adopted a wholly

misguided approach: the terms of Article 5 required him “to close his eyes” to what the

claimants might have recovered under Texas law. Approaching the matter as Article 5

required, the Lord Ordinary should have considered only what the appropriate damages

would have been according to Scots law; anything beyond that was not reasonable and

could not be recovered under the indemnity.

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I reject that argument. Under the contract the only courts with jurisdiction are

the Scottish courts and undoubtedly they must interpret the contract according to Scots

law. The contract provides that the contractors are to indemnify the pursuers against

“any claim, cause of action, loss, expense or liability ... by reason of ... injury to or death

of persons employed by ... the Contractor ....” If the pursuers can show that they have

suffered loss by reason of an injury to, or the death of, an employee of the indemnifying

contractor, then they are entitled to be indemnified. If the contractor disputes liability

and the matter therefore comes before a Scottish court for decision, it will be for the

pursuers to prove both that they have suffered loss by reason of the death or injury of an

employee of the contractor and the amount of that loss. The proceedings will be for

payment of a sum allegedly due under the indemnity. That sum will be determined by

reference to a loss which the pursuers will prove that they have suffered.

Where, as here, the claimants’ claims against the pursuers have already been

determined, in any proceedings on the indemnity the court is not being asked to award

damages for the pursuers’ delict against the claimants. So no question arises of the court

requiring to apply the lex fori to the quantification of damages. Rather, the court will

have to determine, as a matter of fact, what “loss” the pursuers actually suffered. In

determining that question of fact, the Scottish court will use its own prescribed

procedures and laws of evidence. If the loss occurred abroad, then the court will hear

evidence about what happened abroad to show what the loss was. In particular, if the

pursuers had suffered loss because an injured employee had successfully obtained

damages against the pursuers in proceedings in Texas, then the Scottish court would

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have required to hear evidence as to what had happened in those proceedings in Texas in

order to ascertain the pursuers’ loss.

Equally clearly, if the pursuers say that they settled the claims because of their

perception of the value which would be put on those claims in proceedings in Texas,

then in deciding whether the settlement figure was reasonable, the Scottish court requires

to consider two questions of fact. First, what value would be put on those claims in

proceedings in Texas? Secondly, did the pursuers take that matter into account in

settling the claims at a particular level? In order to decide these questions the Scottish

court is entitled to hear evidence. In relation to them, as on any other disputed question

of fact, the court may require to resolve a number of issues on which the evidence is

conflicting. Having considered the evidence and resolved any such disputed issues, the

court will decide what value the claims would have had in proceedings in Texas and

whether the pursuers took that matter into account in settling the claims. On the basis of

the facts so determined, the court will decide whether the settlement figures were

reasonable and hence whether they represent losses which the pursuers are entitled to

recover under the indemnity.

In his opinion the Lord Ordinary explained his approach in this way:

“The court is not being asked to decide precisely what a Texas Court

would have awarded, but rather to evaluate the degree of risk if the claims

had gone to a Texas Court. Of course the distinction between the

situations I have referred to may be narrow but it is a distinction

nevertheless. In order to assess the reasonableness of the settlement I

have to consider the kind of figures that Texas Law and procedures may

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have thrown up but I do not need to apply Texas procedural rules but

simply assess the evidence of experts as to the kind of decision a Texas

Court may have arrived at” (Opinion 5/1022 - 1023).

In my view the Lord Ordinary properly understood the difference between applying

Texas law - which would have been impermissible - and hearing evidence about the way

in which a claim would have been handled and evaluated under Texas law. Having

heard conflicting evidence on that matter in accordance with Scots law, the Lord

Ordinary formed a view of the factual situation which he then used in deciding whether

the settlements reached by the pursuers with the claimants were reasonable. In

approaching the matter in this way, the Lord Ordinary infringed neither the letter nor the

spirit of the Governing Law clause.

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6. THE TAX ISSUE

A further distinct issue arises in the Stena Offshore case in which the pursuers

seek indemnity in respect of the claim arising out of the injuries to Mr. Andrew Murray

Carroll. In all the other test cases the Lord Ordinary assoilzied the defenders on the basis

of the contribution argument. In the Stena Offshore case, as I have explained, the

position was different because it was an Oxy Gap case: although much of the claim by

Mr. Carroll was paid by the pursuers’ insurers, the pursuers were uninsured for a certain

amount of his claim. Since the pursuers had themselves paid the sums in question to the

claimants, their claim, so far as designed to recover those sums, was a claim to recover

sums which they had themselves paid out. The present issue arises out of the effect of

those payments on the pursuers’ tax position. The Lord Ordinary goes into the matter in

considerable detail, but before us both parties presented the issue in a more general way.

I have proceeded simply on these more general arguments.

Much of the detail was agreed by the parties in a Joint Minute (No. 135 of

Process) and again, of course, I have proceeded on the basis of the agreed figures. The

pursuers themselves paid Mr. Carroll a total of £15,330 of his damages in four stages.

The pursuers had a liability to pay both Petroleum Revenue Tax and Corporation Tax.

Their liability to Petroleum Revenue Tax was based on their profits from oil production

and their liability to Corporation Tax on their profits generally. When the pursuers paid

the sum of £15,330 to Mr. Carroll, they claimed relief in respect of this amount for both

Petroleum Revenue Tax and Corporation Tax. At the time when the reliefs were

allowed, the rate of Petroleum Revenue Tax stood at 75% while the rate of Corporation

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Tax stood at 35%. By the time of the proof the rates of these taxes had fallen to 50%

and 33% respectively.

Since the pursuers were able to claim relief from the two taxes, their loss from

having to pay out this element of the damages to Mr. Carroll was accompanied by a

benefit in the form of a reduction in the amount of tax which they required to pay. In

Appendix V to the Joint Minute, the parties quantify this tax benefit to the pursuers as

£13,223.65. On the other hand, if the pursuers recover their payments to Mr. Carroll

from the defenders under the indemnity and are liable to pay tax on them, they will

require to pay the tax at the rate prevailing in the year of recovery. Of course, if the

rates of tax happened to be the same at the time when the pursuers obtained their reliefs

and at the time when they eventually recover the sum due to them from Stena under their

indemnity, the pursuers’ liability to pay the tax on the sum recovered would match the

reliefs which they obtained. In fact, however, as I have explained, by the time of the

proof, the rates of tax had fallen. So, if those lower rates of tax remained in force at the

time of any payment to the pursuers under the indemnity, their liability to pay tax on the

sums received from Stena would be less than the reliefs which they obtained under the

higher rate of taxation. Paragraph 25 of the Joint Minute shows that the amount of tax

which they would require to pay if the current lower rates applied would be £10,579.23.

The position would therefore be that, even though the pursuers had received reliefs for

their payments to Mr. Carroll amounting in total to £13,223.65, they would have to pay

tax of only £10,579.23 on those payments. In other words in this respect they would be

£2,644.42 better off than they would have been if Mr. Carroll had not been injured and

they had required to pay taxes at the original higher rate.

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Before the Lord Ordinary the defenders submitted that, if the court held that the

pursuers were entitled to recover the Oxy gap payments under the indemnity, then their

entitlement to recover should be reduced by £2,644.42 to take account of their lesser

liability to tax. The pursuers submitted that the court should ignore the matter of tax

altogether. Alternatively, the court should not make the reduction sought, at this stage at

least, since the appropriate reduction, if any, would depend on the tax rates prevailing at

the time of any payment by the defenders to the pursuers under the indemnity. By that

time the tax rates might have returned to their previous levels or might indeed have been

raised to still higher levels.

The Lord Ordinary rejected the pursuers’ argument that the court should ignore

the effects of taxation. In the hearing before us counsel for the pursuers did not argue

that he had been wrong to do so. They accepted that we were dealing with the

application of an indemnity clause. As counsel for the defenders instructed us so well,

such a clause is governed by the principles enunciated by Brett L.J. in Castellain v.

Preston and in particular by the principle (11 Q.B.D. at p. 386) that the creditor

“shall be fully indemnified, but shall never be more than fully

indemnified. That is the fundamental principle of insurance, and if ever a

proposition is brought forward which is at variance with it, that is to say,

which either will prevent the assured from obtaining a full indemnity, or

which will give to the assured more than a full indemnity, that proposition

must certainly be wrong.”

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In light of that approach counsel for the pursuers accepted that account should be taken

of the effect of taxation. Mr. Batchelor contended, however, that the Lord Ordinary had

erred in the way in which he had given effect to that approach.

The Lord Ordinary accepted the defenders’ submission that he should deduct

from the sum (£15,330) which would otherwise be recovered from the defenders under

the indemnity the sum of £2,644.42 - representing the amount by which the pursuers

would gain if, at the time of payment under any decree, the tax rates remained the same

as at the date of the proof. This appears to me to be wrong in principle since, in the

event of the rates of tax being increased in the meantime and the pursuers therefore

having to pay more than £10,579.23 in tax on the sum recovered under the indemnity,

the effect would be that the pursuers would not be fully indemnified by the defenders - in

contravention of the self-same fundamental principle laid down by Brett L.J.

Until the pursuers recover under the indemnity and become liable to a charge to

tax, they continue to enjoy a tax benefit of £13,223.45. But, for the defenders, Mr.

Currie specifically accepted that they did not ask for that benefit to be taken into account

at this stage since the pursuers would be required to pay tax if they recovered under the

indemnity. On that approach the advantage, if any, to the pursuers comes into existence

only at the time when they recover under the indemnity and have to pay tax at a lower

rate than was in effect when they obtained the reliefs in question. In these

circumstances, for the reasons which I have given, I consider that it was inappropriate

for the Lord Ordinary to reduce the sum which would otherwise be recoverable under the

indemnity by £2,644.42. Of course, we cannot tell what the rates of tax or the pursuers’

trading position will be when the defenders pay the pursuers this part of their claim

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under the indemnity. For that reason, as not infrequently happens in other contexts, the

court cannot calculate the sum which the defenders will eventually have to pay. But the

court can pronounce a decree which determines how that sum should be calculated. The

exact form of any such interlocutor can be discussed at the By Order hearing. It seems

to me, however, that sufficient specification might be given by an interlocutor finding

the pursuers entitled to payment of £15,330 less the amount, if any, by which £13,223.65

exceeds the total of the charges to Petroleum Revenue Tax and to Corporation Tax to

which the pursuers will become liable on payment. As the Joint Minute demonstrates,

the parties’ advisers were able to do the appropriate calculations based on the rates of tax

prevailing at the date of the proof and I see no reason to anticipate any significant

difficulty in reworking the calculation if the rates of tax have changed by the time when

the defenders come to pay.

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7. INTEREST

Before the Lord Ordinary there was another dispute as to whether the sum

recoverable under the indemnity in the Stena Offshore case should be further reduced to

take account of a payment of interest which the pursuers received from the Inland

Revenue. The point arises because of the way in which the tax reliefs operated. Putting

the matter shortly, the pursuers had been assessed and charged to tax for certain periods.

When they successfully claimed relief in respect of the Oxy Gap payments, the effect

was to reduce the sums on which they had been charged to tax for particular periods and

so an amount of tax became repayable. Under Section 1 of, and paragraph 16 of

Schedule 2 to, the Oil Taxation Act 1975 the amount of tax which became repayable

carried interest at a particular rate. So, in respect of the Oxy Gap payments to Mr.

Carroll, not only was the charge to tax on the pursuers’ earnings reduced, but they also

received from the Inland Revenue interest, agreed as £894.50, to make up for the fact

that they had in effect been required to pay a charge to tax which was not due.

The defenders argued that essentially the interest should be treated in the same

way as the reliefs. There was nothing in the evidence to suggest that, when the pursuers

eventually paid tax on the Oxy Gap payments recovered under the indemnity, they would

also require to repay the interest which had been paid to them under paragraph 16 of

Schedule 2 to the Oil Taxation Act 1975. In that situation the amount of interest should

be deducted from the sum due under the indemnity since otherwise in this respect also

the pursuers would end up being more than fully indemnified for their loss.

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The Lord Ordinary rejected that argument and in my view he was right to do so.

The position is that, unless and until the defenders pay the pursuers the amount due to

them under the indemnity, the pursuers have incurred expenditure in making the Oxy

Gap payments. Under the rules governing the administration of the relevant taxes the

effect of those payments was to reduce the amount of tax for which the pursuers should

have been assessed for the relevant periods. The pursuers had originally been assessed

for a larger sum and, when the excess was repaid by the Inland Revenue, the Revenue

required to pay to the pursuers interest under paragraph 16 to compensate them for being

deprived of the use of their funds. At present therefore the position is in equilibrium. If

and when the pursuers are indemnified by the defenders for their Oxy Gap payments to

Mr. Carroll, depending upon their trading position, they will then become subject to a

charge to tax in respect of that payment in the chargeable period when it is made. The

charge will be a charge to tax which arises at the time of payment; there is no question

of re-opening or correcting the assessment of tax for the past periods in respect of which

the reliefs were granted. So far as those periods are concerned, the position will remain

as at present, in equilibrium.

It is true that, even if the pursuers eventually have to pay tax on the sum

recovered under the indemnity at the same rates as those which prevailed when the

reliefs were granted, they will benefit by only having to pay the tax then rather than, say,

in 1989 or 1990. But that is not in itself any reason to require the pursuers to give credit

for the interest payment made to them under paragraph 16. The import of a finding by

the court that the defenders are liable to indemnify the pursuers in respect of the Oxy

Gap payments is that the defenders have been in breach of their obligation to indemnify

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the pursuers since the times when the relevant payments were made to Mr. Carroll. If

the defenders had indemnified the pursuers promptly, the pursuers would have been

equally promptly assessed to tax in respect of those payments. Therefore, any benefit

which the pursuers may be perceived as deriving from the lapse of time before this

liability to tax arises is a direct consequence of the defenders’ own wrongful refusal to

indemnify the pursuers at an earlier stage. For these reasons the sum of interest paid to

the pursuers by the Inland Revenue under paragraph 16 of Schedule 2 to the Oil Taxation

Act 1975 should not be deducted from the sum due by the defenders to the pursuers

under the indemnity.

It is unnecessary at this stage to do more than indicate the way in which these

issues relating to taxation and interest should be resolved. The appropriate form of

interlocutor can be determined in the light of the discussion at the By Order hearing.

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8. THE LORD ORDINARY’S DECISION ON THE FACTS

As I explained at the start of this opinion, I have considered the opinions of the

other members of the court which deal with the appeal against the Lord Ordinary’s

decision on matters of fact. I agree with those opinions and, for the reasons expressed in

them, I would not interfere with the Lord Ordinary’s decision in this respect. That being

so, it would serve no useful purpose for me to repeat the same views at length in

different words. I therefore propose to limit myself to commenting on some of the

issues.

8.1 Onus of Proof

The pursuers led evidence in order to establish the necessary factual basis for

their case that the defenders were liable on the indemnities. The first issue that has to be

considered is where the burden of proof lay.

The Lord Ordinary explained the position by saying that, to bring themselves

within the indemnity provisions, the pursuers “clearly had to prove that an accident had

occurred that justified them in paying damages to the claimants and I think they accepted

that this involved requiring to prove what had caused the accident” (Opinion 2/199).

Although the point was not explored at length before this court, I think it is worth

spending just a moment exploring exactly why the Lord Ordinary came to describe the

position in this way.

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The pursuers accept - and this is obvious - that the initial onus is upon them to

establish that the claims brought against them by the persons injured and by the relatives

of the deceased were claims arising by reason of injury to, or death of, persons employed

by the defenders, which had “a reasonable prospect of success” or had “some prospect

or a significant chance of success”: Comyn Ching Co. Ltd. v. Oriental Tube Co. Ltd.

(1981) 17 B.L.R. 47, per Goff L.J. at p. 80 and per Brandon L.J. at p. 92 respectively. If

the pursuers prove that much, then they bring themselves within the scope of the

indemnity “unless such injury, death ... was caused by the sole negligence or wilful

misconduct of the party which would otherwise be indemnified”. As the reference to

“the party which would otherwise be indemnified” makes clear, the “unless” clause

works as an exception which comes into play only where the creditor in the indemnity

obligation has already fulfilled the other conditions of the indemnity clause. In that

situation the party would fall to be indemnified if the exception did not apply. Given

that the clause works as an exception, I am satisfied that the exception will not apply

unless it is positively established that the claim against the company is one arising by

reason of death or injury caused by the sole negligence or wilful misconduct of the

company.

So far as establishing that the claims against them would have a reasonable

prospect of success is concerned, the pursuers really had little difficulty. As I have

explained above in Part 2.1 of the opinion, it is common ground that at the relevant time

the 1976 Regulations applied to the platform and that, if men on it were killed or injured

owing to a breach of the Regulations, then an action for damages could be brought on the

basis of that breach.

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As counsel for the defenders pointed out, the effect of Regulation 32(1) was

sweeping since it imposed on the pursuers a duty to ensure that all of the regulations

were complied with; consequently, if any of the regulations was not complied with by

anyone on the platform, the pursuers were ipso facto in breach of Regulation 32(1) and

hence liable in damages for death or injury resulting from that breach. It cannot be

disputed that, if an oil production platform is operated properly, it will not normally

blow up. In the absence of any other explanation, the very happening of the explosion

therefore allows the inference to be drawn that someone on the platform had done

something which was likely to endanger the safety and health of himself and other

persons on the platform or to render some equipment on the platform unsafe. That being

so, merely by proving that the explosion occurred on the platform, the claimants would

establish liability on the part of the company for breach of Regulation 32(1). Here the

pursuers established that the explosion occurred on the day in question and that the

horrific deaths and injuries occurred as a result. That being so, they established that the

claimants had, at the least, a reasonable prospect of success. The pursuers thereby

brought themselves within the scope of the indemnities, subject, of course, to the

exception contained in the “unless” clause.

The other basis for any claim against the pursuers would be negligence. So far as

that aspect was concerned, the Lord Ordinary held that, because the pursuers were in

control of the platform, the res ipsa loquitur rule would apply. In other words, since the

disaster would not have occurred in the ordinary course of things if the management had

used proper care, in the absence of explanation by the pursuers, proof that the disaster

occurred would be reasonable evidence that it arose from want of care on the part of the

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pursuers. Cf. Scott v. The London and St. Katherine Docks Co. (1865) 3 H. & C. 596,

per Erle C.J. at p. 601 as applied in Devine v. Colvilles Ltd. 1969 S.C. (H.L.) 67.

Although in the Outer House the pursuers contested the applicability of the rule, they did

not re-open that point in the hearing before this court. In a passage at the end of the

section of his opinion dealing with res ipsa loquitur the Lord Ordinary sets out his

conclusion in this way (Opinion 5/961):

“The position therefore is that in my view the pursuers would inevitably

be held negligent in respect of the accident. They have advanced no

explanation for the accident which could exonerate them. The only

explanation that they have advanced for the accident accepts that they had

a measure of blame for it. Thus unless they can prove a cause of the

accident which supports their case that Score were also to blame for the

accident the inference would have to be that they and they alone were at

fault. In that situation the exclusion in the indemnity in respect of sole

negligence would obviously apply. Therefore as the defenders argue it is

critical to the pursuers’ case that they have proved that the accident

happened in the general way that they have averred.”

In the first three sentences the Lord Ordinary explains that, since the pursuers have led

no evidence which would exonerate them and the evidence which has been led accepts

“that they had a measure of blame for it”, they would inevitably be found liable in

negligence. He then goes on to say that “unless they can prove a cause of the accident

which supports their case that Score were also to blame for the accident the inference

would have to be that they and they alone were at fault” (emphasis added). The Lord

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Ordinary proceeds on the basis that, because the application of res ipsa loquitur allows

the court to conclude that the pursuers would be liable to the claimants on the basis of

negligence, this will in itself allow the court to infer that they alone were at fault, unless

they can prove a cause of the accident to support their case that Score were also to

blame. Somewhat similar formulations are to be found elsewhere in the Lord Ordinary’s

opinion (5/1080 and 1120 - 1121).

At first sight the Lord Ordinary’s reasoning appears to involve a logical jump

from a conclusion that the pursuers were negligent to a conclusion that they alone were

negligent and that theirs was “sole negligence” in terms of the indemnity clause. None

the less, I am satisfied that, in the circumstances of this particular case, the Lord

Ordinary was fully justified in adopting that approach.

Mr. Batchelor explained the approach which the pursuers took to this matter.

From the outset they had accepted that it could be proved that there had been an

explosion on the platform. Moreover, they had satisfied the Lord Ordinary that the

explosion had been caused by an accumulation of condensate being ignited in Module C.

At the proof the defenders had disputed this, but they now accepted it and they had not

re-opened that issue before this court. In that situation res ipsa loquitur would

demonstrate that the pursuers had been negligent in their management of the platform, in

particular by allowing an explosion to occur in Module C. But, in addition, the pursuers

accepted that Score were the only contractors who were entirely independent of the

pursuers and who were working in Module C at the relevant time. For that reason the

pursuers accepted that Score were the only persons - apart from the pursuers themselves

- whose negligence could have caused the explosion in Module C. It followed that,

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unless the pursuers established that Score had been negligent, the only conclusion

properly open to the Lord Ordinary was that only the pursuers had been negligent. If the

pursuers failed to prove negligence on the part of Score, the defenders would therefore

be entitled to the benefit of the exclusion in the indemnity without having to lead

evidence positively excluding the possibility of negligence on the part of some other

party. In that situation the pursuers had been content before the Lord Ordinary, and were

content before this court, to proceed on the basis that, unless they could show that Score

were negligent, the court must conclude that only the pursuers themselves had been

negligent and that the defenders were entitled to the protection of the exclusion clause in

the indemnities.

Counsel for the defenders confirmed that the approach outlined by counsel for the

pursuers had been common ground before the Lord Ordinary and remained common

ground. So, if the court reached the view that the pursuers had failed to establish that

Score had been negligent, we should hold not simply that the pursuers had been

negligent and that it had not been proved that anyone else had been negligent but, more

positively, that the disaster had been due to the negligence of the pursuers and of no-one

else. The proper conclusion would be that the deaths and injuries had been caused by the

sole negligence of the pursuers and that the defenders were therefore not liable under the

indemnities.

8.2 Reviewing the Decision on Fact in this Particular Case

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The approach which an appellate court should take when asked to review a

decision on fact made by a first instance judge who saw and heard witnesses has been

discussed in many cases. In an evergreen passage in Thomas v. Thomas 1947 S.C.

(H.L.) 45 at p. 54 Lord Thankerton formulated three propositions:

“(1) Where a question of fact has been tried by a Judge without a jury,

and there is no question of misdirection of himself by the Judge, an

appellate Court which is disposed to come to a different conclusion on the

printed evidence should not do so unless it is satisfied that any advantage

enjoyed by the trial Judge by reason of having seen and heard the

witnesses could not be sufficient to explain or justify the trial Judge’s

conclusion. (2) The appellate Court may take the view that, without

having seen or heard the witnesses, it is not in a position to come to any

satisfactory conclusion on the printed evidence. (3) The appellate Court,

either because the reasons given by the trial Judge are not satisfactory, or

because it unmistakably so appears from the evidence, may be satisfied

that he has not taken proper advantage of his having seen and heard the

witnesses, and the matter will then become at large for the appellate

Court. It is obvious that the value and importance of having seen and

heard the witnesses will vary according to the class of case, and it may be,

the individual case in question.”

Counsel for the defenders did not challenge these propositions as general

statements of the proper approach. They submitted, rather, that this was a somewhat

unusual case where the Lord Ordinary’s opinion contains very few comments on the

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credibility of the witnesses. For that reason they argued that we were not constrained, as

usually we would be, to defer to the Lord Ordinary’s decisions to accept, reject or give a

particular weight to parts of the evidence. This court could therefore more readily assess

the evidence for itself and, where appropriate, draw fresh conclusions and reject findings

in fact made by the Lord Ordinary. We could also find different facts established.

Indeed defenders’ counsel invited us to make a large number of such fresh findings in

fact.

It is true that in his opinion the Lord Ordinary has for the most part refrained

from criticising the credibility of the witnesses. That fact does not in itself mean that

this court is free to substitute its view of the facts for the Lord Ordinary’s. Lord Shaw of

Dunfermline dealt with this matter in Clarke v. Edinburgh and District Tramways Co.

1919 S.C. (H.L.) 35 at pp. 36 - 37. The passage is worth quoting in full:

“When a Judge hears and sees witnesses and makes a conclusion or

inference with regard to what is the weight on balance of their evidence,

that judgment is entitled to great respect, and that quite irrespective of

whether the Judge makes any observation with regard to credibility or not.

I can of course quite understand a Court of appeal that says that it will not

interfere in a case in which the Judge has announced as part of his

judgment that he believes one set of witnesses, having seen them and

heard them, and does not believe another. But that is not the ordinary

case of a cause in a Court of justice. In Courts of justice in the ordinary

case things are much more evenly divided; witnesses without any

conscious bias towards a conclusion may have in their demeanour, in their

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manner, in their hesitation, in the nuance of their expressions, in even the

turns of the eyelid, left an impression upon the man who saw and heard

them which can never be reproduced in the printed page. What in such

circumstances, thus psychologically put, is the duty of an appellate Court?

In my opinion, the duty of an appellate Court in those circumstances is for

each Judge of it to put to himself, as I now do in this case, the question,

Am I - who sit here without those advantages, sometimes broad and

sometimes subtle, which are the privilege of the Judge who heard and

tried the case - in a position, not having those privileges, to come to a

clear conclusion that the Judge who had them was plainly wrong? If I

cannot be satisfied in my own mind that the Judge with those privileges

was plainly wrong, then it appears to me to be my duty to defer to his

judgment.”

At the start of the passage Lord Shaw stresses that a judge’s conclusion or inference with

regard to the weight and balance of the evidence is entitled to great respect “and that

quite irrespective of whether the Judge makes any observation with regard to credibility

or not.” So, the mere absence of comment on credibility would not, even in a normal

case, diminish the deference which the appeal court should pay to the first instance

judge’s assessment of the weight and balance of the evidence. The present is not,

however, by any means a normal case and the factors which make it abnormal also

suggest that we should be particularly cautious about disturbing the Lord Ordinary’s

assessment of the evidence.

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The critical witnesses to fact who gave evidence at the proof had all survived an

appalling and terrifying disaster. For the rest of their lives they will have to live with the

memories of that evening and with the loss of so many friends and colleagues. The

explosion and its aftermath will undoubtedly have affected the recollection of the

witnesses, to a greater or lesser degree. Moreover, the survivors would have a very

human and understandable reluctance to say anything which might be used to criticise

those who died and who cannot defend themselves. The Lord Ordinary specifically

recognises this, for instance, when he remarks that claims by Vernon’s “former

workmates that he was exceptionally conscientious must of course be viewed cautiously”

(Opinion 4/763). In these circumstances the Lord Ordinary’s task in assessing the

evidence of the survivors was of unusual difficulty and delicacy. In addition, he would

himself be anxious not to risk increasing the burden on the survivors who assisted the

court with their evidence by putting on to the face of his opinion reservations or

criticisms which he felt about their evidence. In my judgment, therefore, so far from this

being a case where an appellate court could feel comparatively free to interfere with the

Lord Ordinary’s assessment of the weight and balance of the evidence, it is in fact a case

where we should be particularly restrained in doing so.

8.3 The Lord Ordinary’s Overall Approach

Many of the people who could have given important evidence about the

circumstances giving rise to the explosion died in the disaster. Indeed in the proof no

witness spoke to Sutton’s actings in fitting the blind flange to the pipework from which

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PSV 504 had been removed. Nor did any witness speak directly to Vernon

repressurising the pump. The Lord Ordinary’s conclusion that the explosion had resulted

from the faulty fitting of the blind flange and the subsequent repressurising of pump A is

therefore built on circumstantial evidence. As in many cases built on circumstantial

evidence, there are, of course, points to be made against that conclusion and they were,

very properly, advanced by counsel for the defenders both in the Outer House and before

us. None the less, having made due allowance for those criticisms, I am unable to say

that the Lord Ordinary was not entitled to reach the conclusion which he did.

At first sight it seems surprising that, with so much of the evidence destroyed or

unavailable at the bottom of the North Sea, the Lord Ordinary could reach any

conclusion at all as to the cause of the accident. He himself was conscious of the fact

that evidence was missing and was conscious also of the need for care before attributing

blame to persons who had been killed in the disaster and who could not speak for

themselves. And indeed defenders’ counsel had urged upon the Lord Ordinary that the

available evidence was so flimsy that he should hold that the cause of the accident had

not been proved. While acknowledging the problems, the Lord Ordinary nevertheless

took the view that he had available to him a “huge array” of evidence (Opinion 4/855),

individual pieces of which, though each in itself inconclusive, “when viewed together

paint such a clear picture that only one conclusion is possible” (Opinion 4/856).

Elsewhere, the Lord Ordinary said that, having reviewed the evidence carefully, he was

“led to the view that there is a marked probability that this accident was

caused because Mr Vernon proceeded to introduce hydrocarbon to the

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pump at a time when this should have been avoided - that is to say at a

time when PSV 504 was not in place” (Opinion 6/1443).

I shall look in a moment at the evidence upon which the Lord Ordinary came to

that conclusion. The terms of the conclusion are, however, important because the

defenders placed considerable reliance on the approach of the House of Lords in Rhesa

Shipping Co. S.A. v. Edmunds (The “Popi M”) [1985] 1 W.L.R. 948. The issue before

the Commercial Court in that case was whether the owners had proved that the ship had

been lost by perils of the sea. Bingham J., as he then was, held that they had proved this

([1983] 2 Lloyd’s Rep. 235). More particularly, he held that the ship had sunk due to a

collision with a submarine - though no submarine had been sighted. He reached that

view because he rejected the theory put forward by the underwriters that the vessel had

sunk due to wear and tear. More importantly, he concluded that the vessel had collided

with the submarine even though he had already said ([1983] 2 Lloyd’s Rep. at p. 246 col.

1) that, while it would be going too far to describe a collision with a submarine “as

impossible”,

“it seems to me to be so improbable that, if I am to accept the plaintiffs’

invitation to treat it as the likely cause of the casualty, I (like the

plaintiffs’ experts) must be satisfied that any other explanation of the

casualty can be effectively ruled out.”

In reversing the decision of the Court of Appeal, upholding the decision of

Bingham J., the House of Lords criticised his reasoning, particularly in the context of a

case where much of the evidence was unavailable. Lord Brandon stressed that, even

when faced with two competing explanations, a judge can reject both and hold that he

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cannot make up his mind one way or the other. In that situation by reason of the burden

of proof the plaintiff’s action will fail. The Lord Ordinary was alert to these

considerations and to the possibility of reaching a conclusion that the case had not been

proved; in his view the court had to be “careful to avoid deciding the case simply on the

most attractive hypothesis if this does not amount to a clear probability” (Opinion 2/214

– 215). Lord Brandon also emphasised that a trial judge required to use common sense

in applying the legal concept of proof on the balance of probabilities. He continued

([1985] 1 W.L.R at p. 956 C - D):

“If such a judge concludes, on a whole series of cogent grounds, that the

occurrence of an event is extremely improbable, a finding by him that it is

nevertheless more likely to have occurred than not, does not accord with

common sense. This is especially so when it is open to the judge to say

simply that the evidence leaves him in doubt whether the event occurred

or not, and that the party on whom the burden of proving that the event

occurred lies has therefore failed to discharge such burden.”

The present case shares one particular characteristic with Rhesa Shipping: in

both not all the relevant facts were known to the first instance judge. But the cases differ

in another vital respect. In Rhesa Shipping the commercial judge made a series of

detailed findings on matters of fact on the basis of which he was able to say that it was

“improbable” that the vessel had collided with a submarine. Yet he went on to hold, on

the balance of probabilities, that the very thing which was “improbable” had occurred.

In this case, by contrast, the Lord Ordinary made a series of findings on which he was

able to say that there was “a marked probability” that the accident had occurred due to

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Vernon introducing condensate into the pipework from which PSV 504 had been

removed. That in turn implied that there had been a leak from that area and “the most

likely cause of the leak” was that Sutton had failed to tighten the bolts properly (Opinion

6/1443 - 1444). Since the Lord Ordinary was satisfied that there was “a marked

probability” that the disaster occurred in this way, the decision of the House of Lords in

Rhesa Shipping is distinguishable. A court which has found a marked probability that an

accident happened in a particular way and has rejected the competing explanation

offered by the defenders is entitled to hold that the accident did indeed happen in the

way which it regarded as a marked probability. In particular there is no reason why the

court should hold that the cause of the accident has not been proved. For that reason I

reject the defenders’ criticism of the Lord Ordinary’s decision based on Rhesa Shipping.

Of course, the mere fact that the Lord Ordinary says that there is a marked

probability that the accident happened in a particular way does not make his conclusion

immune from review if there is no basis upon which he could properly have reached that

conclusion. In my view, however, in this case the Lord Ordinary has set out a number of

circumstances which entitled him, if so advised, to reach the conclusion that the accident

occurred due to the faulty fitting of the blind flange to the pipework from which PSV

504 had been removed.

At the outset, it is worth remembering that at the proof the defenders’ main attack

on the pursuers’ case was based on the contention that the initial explosion had occurred

in Module B rather than in Module C. A very great deal of the scientific evidence which

the Lord Ordinary heard, on the strength of the firewalls and so forth, was devoted to

this issue which the Lord Ordinary resolved in favour of the pursuers. In the reclaiming

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motion the defenders did not challenge that finding of the Lord Ordinary. It follows that

he was entitled to start from the secure position that the initial explosion occurred in

Module C. Indeed the defenders accepted that the explosion occurred in the south-

eastern quadrant of Module C.

It was not, of course, disputed by the defenders that the mere happening of the

explosion in the south-eastern area of Module C showed that something had gone wrong

in that area. It might be thought that, when the platform was producing oil, there would

be many opportunities at any time for those working in Module C to operate the

equipment in such a way as might, if it went wrong, produce an explosion. But, in fact,

as the agreed account of the operation in Module C demonstrates (Appendix, pp. 46 – 53

and 102 - 115), that is not so. When the equipment in Module C was working properly,

it operated by itself. Those on duty were there essentially to keep an eye on the

equipment, to service it and to which repair it when it broke down. Moreover, the permit

to work system which is described in Part 4.2.1 and 2 of the Appendix - even if not

always operated to perfection - meant that officials on the platform would be aware if

work was being done on the equipment. It is for this reason inter alia that we can be

certain that, on the 68-foot level, condensate injection pump A was taken out of service

and depressurised during the course of 6 July and that, in Module C, Score employees

removed and did not replace PSV 504. The Lord Ordinary was also entitled to be

satisfied, on the basis of Mr. Alexander Rankin’s evidence, that no other valve had been

removed for testing in that area on that day. It will be recalled also that, as I mentioned

in Part 8.1, the parties proceeded on the basis that Score were the only independent

contractors working in Module C.

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The removal of PSV 504 is important because it involved a breach in the

integrity of the pipework carrying condensate. It was common ground that the explosion

had been caused by the ignition of gas from condensate which had leaked into the

atmosphere. It was also agreed that, in order to cause the explosion, there required to

have been a fairly large volume of condensate. There was pipework in Module C which

carried condensate in sufficient quantity to cause the explosion if it was ignited, but there

is nothing in the evidence to suggest any reason why a leak should have occurred at

another point in the pipework in the Module - and, for the reason which I have given,

one cannot simply assume that on the evening in question someone or other might have

been carrying out an operation which would have breached the integrity of some other

part of the pipework in the south-eastern quadrant of Module C. The defenders accepted

that, if pump A had been pressurised, this could have given rise to a leak of the necessary

quantity of condensate from the area of the blind flange on the pipework from which

PSV 504 had been removed - although they pointed out that it would have involved

introducing condensate into the pump for some seconds after the chest was full. On the

other hand Mr. Keen argued that, if a leak from the area of PSV 504 could have provided

enough condensate, then the same could be said of the area of PSV 505. That is, of

course, strictly correct but, to judge from the evidence, at the relevant time PSV 505

must have been in position (since pump B had been in operation) and there is nothing in

the evidence to suggest that it was leaking. The evidence that PSV 504 had been

removed and not replaced, combined with the evidence that the initial explosion

occurred in the south-eastern quadrant of Module C, would in itself go some way to

pointing to the area of PSV 504 as the source of the leak which caused the explosion.

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The case for drawing that inference is strengthened by the evidence of Mr. Erland

Grieve, who was on the 68-foot level. He spoke to seeing a fireball apparently hanging

in the roof space immediately above the area in between the two condensate injection

pumps. It was right up under the deck of Module C. This was immediately after the

explosion (Evidence 62/9323 - 9328). The defenders did not cross-examine Grieve on

this point. I consider that the Lord Ordinary was entitled to regard it as significant that

this fireball should have been burning quite close to the site of PSV 504 (Opinion 4/864).

It was open to him to conclude that this localised phenomenon tended to point to the leak

having occurred in the area of PSV 504, although the actual ignition could, of course,

have occurred at another point in Module C.

The removal of PSV 504 would not in itself have given rise to an escape of

condensate and an explosion. An explosion would require the introduction of condensate

in sufficient quantity into the relief line. It was common ground that the necessary

quantity could not have reached the relief line merely by reason, for example, of one of

the GOVs on pump A allowing condensate to pass. It would have required pump A to

be pressurised. There was evidence from both Mr. Geoffrey Bollands and Mr. Alex

Clark which pointed very clearly to Vernon’s intention, in the period before the

explosion, to try to restart pump A. The pump could not have been restarted without

first being pressurised. So, evidence of an intention to restart pump A is, by implication,

evidence of an intention to repressurise it. Of course, no-one saw Vernon actually

jagging the pump - and he could have changed his mind and have decided not to do so.

But, when the Lord Ordinary had clear evidence that Vernon was intending to restart

pump A a few minutes before the explosion, he was entitled, in the absence of evidence

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to the contrary, to infer that Vernon had acted on that intention and had pressurised

pump A. Moreover, the theory that pump A was jagged in two stages provides a

possible explanation for the undoubted fact that there was a period of approximately two

or three minutes between the low gas alarm on C centrifugal compressor and the flurry

of low gas alarms and a high gas alarm just before the explosion. That being so, the

Lord Ordinary was also entitled to hold, first, that Vernon repressurised the relief line at

a time when PSV 504 had been removed and, secondly, that as a result a leak of

condensate occurred in that area.

No leak would have occurred in that area merely because pump A was

repressurised and condensate under pressure was thereby introduced into the relief line.

At the proof the defenders accepted, however, that, if a leak did indeed occur from the

pipework in the area of PSV 504, the Lord Ordinary would be entitled to conclude that

this had been because the necessary blind flange had not been fitted properly to the

pipework. Before us, counsel for the defenders came to qualify that concession slightly,

but only to the effect that there might have been some fault in the blind flange itself

which Sutton or other employees of Score failed to detect. I consider that we must

proceed on the basis adopted by the defenders in the proof. The Lord Ordinary notes

that there was no evidence that the ring seal relating to the flange was faulty – and he

was therefore able to exclude that possibility (Opinion 4/789). Similarly, there was no

evidence to suggest that the flange itself might have contained a flaw which could not be

detected. It would in my view be prejudicial to the pursuers to allow the defenders to

introduce that theory at this stage. Had the defenders advanced such an argument in the

court below, the pursuers might have led evidence to counter it. For these reasons, I am

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satisfied that, having concluded that a leak occurred in the vicinity of PSV 504, the Lord

Ordinary was entitled to draw the inference that the blind flange had not been fitted

properly.

Counsel for the defenders submitted that there was nothing in the evidence which

made it probable that Sutton would have failed to fit the blind flange properly and that

the Lord Ordinary had therefore erred in drawing that inference. The inference is based,

of course, on the chain of reasoning from the available circumstantial evidence. Counsel

for the pursuers argued that there were in any event elements in the evidence relating to

the work on PSV 504 which could provide support for the view that Sutton might have

failed to fit the flange properly. They pointed out that it was anticipated that the valve

would be replaced the same day. So, if it was to be out of position for only a

comparatively short time, Sutton might have thought that it was sufficient to put on the

blind flange – and so prevent anything getting into the pipework – without tightening it

up fully. The witness Bagnall gave evidence which, though open to criticism, suggested

that the actual process of fitting the flange and tightening up the bolts would have been

more difficult than usual for one man to perform because of the position of this

particular valve (Evidence 71/10617 – 10620). That evidence does in my view provide a

basis for the Lord Ordinary’s conclusion (Opinion 4/786) that Sutton is likely to have

had some trouble in fitting the flange properly and, if he thought that the work was only

for a short time, he might have been tempted to do the tightening half-heartedly.

Although that conclusion does not, in itself, take the matter very far, it does take the

edge off the defenders’ criticism that it is unlikely that Sutton would have acted in this

way.

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The Lord Ordinary’s conclusion that the disaster occurred because condensate

escaped from the blind flange depends on attributing fault to both Mr. Sutton who fitted

the blind flange and to Mr. Vernon who jagged the pump when the PSV was not in

place. The conclusion that these men had been at fault was one to which the Lord

Ordinary was led by his process of reasoning on the evidence. Since that was his

conclusion, the Lord Ordinary required to state it, as he did. I emphasise this because,

after the Lord Ordinary’s opinion was issued, he was criticised in some sections of the

media for attributing fault to Mr. Sutton and Mr. Vernon, who had not survived the

disaster and who could not defend themselves. In his opinion the Lord Ordinary said

expressly that he was well aware how unfortunate it was that he had to blame Mr.

Vernon and Mr. Sutton in these circumstances (Opinion 6/1444 - 1445). But,

unpalatable though he found this aspect of his duty, the Lord Ordinary performed it. A

judge who performs an unpalatable but necessary duty does not deserve to be criticised.

8.4 The Approaches of the Parties in the Outer House: the Evidence of Bollands

and Clark

In order to establish their case that the defenders were obliged to indemnify the

pursuers against their loss from the payments made to the defenders’ employees and their

relatives, the pursuers had to establish that they would have been liable to those

employees and relatives. It was not difficult for the pursuers to aver (in Article 4 of

Condescendence in the London Bridge action, for example), and indeed to show, that

they would have been liable on the basis of Regulations 32 and 33 of the 1976

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Regulations and Section 11(2) of the 1971 Act. In Article 4 the pursuers averred inter

alia that they were liable to compensate the victims and relatives in respect of the fault

and negligence of Vernon for which they would be vicariously liable. In particular they

averred that in terms of the permit to work procedure Vernon had been under a duty to

check the PSV 504 worksite and that he had not done so by the time of the explosion. At

the same time as blaming Vernon, the pursuers had, of course, to avoid painting his fault

so strongly that it would amount to “wilful misconduct”, since that would have brought

the case within one of the exceptions in the indemnities. In Answer 4 the defenders

denied the pursuers’ averments about Vernon’s fault and negligence, their position, as set

out in Answer 3, being that the damage to the platform was consistent with an explosion

in Module B. On 11 December 1995, just before Day 288 of the proof, the defenders

lodged a minute of admissions, admitting the duty on Vernon to check the worksite and

admitting that, if he had done so, he would have become aware that PSV 504 had been

removed and not replaced (Opinion 4/731).

In order to establish their case against the defenders the pursuers had to go

further, however. As I explained in Part 8.1, to avoid the exclusion in the indemnities

for cases where the deaths and injuries had been caused by the sole fault of the pursuers,

the pursuers had to establish that the fault of some other person had contributed to those

deaths and injuries. In Article 5 of Condescendence, accordingly, the pursuers averred

that Sutton and Rankin, both employees of Score, had been negligent - the former in

fitting the blind flange to the pipework from which PSV 504 had been removed; the

latter in failing to check that the flange had been fitted securely and to check that the

work site was in a safe condition. In Answer 5 the defenders denied those averments. In

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addition the defenders averred that the permit to work system had not been followed

properly on the platform and that, had the pursuers implemented that system, “then

Robert Vernon would have been aware at the material time that PSV 504 had been

removed and not replaced.”

In short, when the proof began, according to the pleadings, the pursuers were

blaming Vernon for failing to check the PSV 504 worksite, while the defenders were

averring that on the evening of the explosion Vernon had not been aware that PSV 504

had been removed and not replaced. Even though counsel for the defenders had clearly

altered their stance by the time that they amended their pleadings, they must have still

been adhering to that position when Bollands, the control room operator, gave evidence

which suggested that, in the period immediately before the explosion, Vernon had acted

in a manner which was consistent with his not being aware that PSV 504 had been

removed. For counsel for the defenders did not cross-examine Bollands on the events in

the control room before the explosion.

Among other things, Bollands was “very certain” (Opinion 4/738) that when

Vernon came into the control room he took a pink (hot work) permit from the 68-foot

level box. The inference was that this was a permit for the maintenance work on

condensate injection pump A since any permit to work relating to the maintenance of

PSV 504 would have been a blue (cold work) permit. Moreover, if the permit had been

suspended, it would not have been in the permit box in the control room. Indeed

Bollands said in evidence that earlier that evening, when looking through the permits to

work, he had seen a pink permit relating to the planned maintenance on condensate

injection pump A. He also said that work had been done on the pump. In addition

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Bollands spoke to Vernon and Clark having met and having had a conversation in the

control room and he said that, when Vernon left the control room to go back to the 68-

foot level, he left the permit with Clark.

On the other hand, Clark gave evidence to the effect that no work had been

started on condensate injection pump A and that no permit to work had been issued for

it. He also said that he had not met Vernon in the control room but had spoken to him on

the telephone. More importantly, he was “positive” (Evidence 67/10014 and 10015) that

he had not seen any permit. When he had gone into the control room he had seen the

electrical isolation tags lying on the Lead Operator’s desk and had picked them up and

looked to see whether Vernon had signed them.

The Lord Ordinary was faced with an extremely difficult task in assessing the

evidence of these two witnesses on these matters. It has to be borne in mind in particular

that Bollands was a reluctant witness who stated in the course of his evidence that he had

spent five years trying to put the incident behind him and that he had come to court

under protest (Evidence 62/9458). Moreover, he was not cross-examined on the matters

which became of vital importance and on which defenders’ counsel ultimately criticised

his evidence. Despite the problems with his evidence, the Lord Ordinary records that

“As between Mr Bollands and Mr. Clark I formed the view that Mr Bollands had in

general been the more accurate observer but it would be remarkable if any witness could

be taken as totally reliable in all matters of detail and this must include Mr Bollands”

(Opinion 4/766). Later (Opinion 4/767) he says that there are parts of Bollands’

evidence where it is possible that his memory is not accurate, but that there are certain

details which are more likely to be accurate than others. On the other hand the Lord

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Ordinary indicates that “Mr Clark’s evidence has to be read with a certain caution and is

not in all respects convincing”, although he was not in a position to suggest that Clark

was consciously misleading the court (Opinion 4/766). The Lord Ordinary observes that

both Bollands and Clark had suffered frightening experiences when the accident

occurred and that Clark had been blown across the control room and injured. “With such

a shock” he says, “it would perhaps be expecting too much for Mr Clark in particular to

have a reliable recollection of detail some years after the accident” (Opinion 4/766).

In their submissions to this court counsel for the defenders invited us to make

various specific findings which would be based on accepting Clark’s evidence and

rejecting parts of Bollands’ evidence. For instance, they invited us to find that the

conversation between Vernon and Clark had taken place by telephone and hence that,

contrary to Bollands’ evidence, Clark and Vernon had not met in the control room. In

itself the question of whether they spoke on the telephone or in the control room would

not matter, but that evidence really forms part of Bollands’ whole account of what

Vernon - and indeed Clark - did in the crucial few minutes before the explosion. The

Lord Ordinary made no specific finding on the point and, by inviting us to make a

positive finding, counsel for the defenders were really asking us positively to reject a not

insignificant part of Bollands’ account.

Even more importantly, counsel for the defenders invited the court to make

findings that the permit to work for the planned maintenance on condensate injection

pump A was not issued on either the day or night shifts of 6 July. In doing so, they

invited the court to accept Clark’s evidence on that matter. Of course, they could point

to other evidence which could be construed as supporting Clark’s evidence on the point.

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But, crucially, their submission depended on the court rejecting Bollands’ evidence that

he had seen a live permit for work on pump A and that Vernon picked up a pink permit

from the 68-foot level box.

The Lord Ordinary anxiously examined the competing bodies of testimony on

this matter (Opinion 4/767 - 769) and did not reject Bollands’ evidence despite the

various difficulties which he acknowledged. Given the conflict between the two

witnesses and the Lord Ordinary’s expressed view that Bollands had been the more

accurate observer, I am satisfied that it would be quite wrong for this court to reject the

Lord Ordinary’s assessment of the evidence on this point. Moreover, the Lord Ordinary

draws attention (Opinion 4/772) to the evidence that Clark knew (67/9991) that Vernon

asked him “if we could get the pump back, if we had started working on it”. As the Lord

Ordinary remarks, this would be an odd question for a Lead Production Operator to ask

unless he thought that a permit to work on pump A had been issued, since no work could

have been done without a permit. This would tend to undermine Clark’s evidence that

no such permit had been issued for work on pump A and to support Bollands’ evidence

that he had seen a permit for work on that pump and that he had seen Vernon with a pink

permit in his hand.

Indeed, going further, I can find no proper basis for differing from the Lord

Ordinary’s assessment on other points where the evidence of the two witnesses cannot be

reconciled. On all these matters, applying Lord Shaw’s test in Clarke, I cannot come to

a clear conclusion that the Lord Ordinary who had the advantages of seeing and hearing

the witnesses was “plainly wrong”. In particular, having studied the transcript of the

evidence of Bollands and Clark, I see no proper basis for substituting any view which I

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might form for the Lord Ordinary’s view of Bollands’ evidence about the events in the

control room. In saying this, I am influenced in part by the fact that his evidence was

not tested in cross-examination so that it is particularly difficult for anyone reading the

transcript alone to gauge the strength of Bollands’ evidence on particular points where he

differs from Clark. Conversely, the Lord Ordinary’s express warning that some of

Clark’s evidence had to be viewed with caution makes it that much more difficult for this

court to decide to accept portions of his evidence which the Lord Ordinary did not.

8.5 Vernon’s Knowledge of the Absence of PSV 504

A key aspect of the Lord Ordinary’s decision and a central area of debate before

us was the issue of whether, shortly before 10 p.m., at the time when he was intending to

restart pump A, Vernon knew that PSV 504 had been removed and had not been

replaced. This was important for two reasons. First, it could be said that, if Vernon had

known that PSV 504 was not in place, he would not have restarted the pump. So, if the

correct conclusion on the evidence was that he did know, then the correct conclusion

would equally be that he did not repressurise pump A - and so the whole basis of the

pursuers’ case would collapse. Alternatively, if Vernon did know that PSV 504 was

missing and none the less repressurised pump A, then he was guilty of wilful misconduct

and so the exception in the indemnities would apply and the defenders would not be

liable. The two lines of argument do not always run easily together but at the heart of

both lies the same issue of Vernon’s knowledge.

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As is obvious, the Lord Ordinary accepted the evidence - which I regard as

satisfactory - that shortly before the explosion Vernon was intending to start pump A.

He proceeded to set out and to analyse the evidence and contentions of the parties as to

Vernon’s knowledge (Opinion 4/718 - 763), including the evidence of Bollands that,

when he met Vernon shortly after the explosion, “he was asking me what had happened”

(Evidence 63/9523) – suggesting that Vernon had made no connexion between his

activity in trying to restart pump A and the explosion. After considering the evidence,

the Lord Ordinary gives his conclusions on the point (Opinion 4/763 - 779). At the end

of that discussion he sums up his position in a passage, the wording of which I regard as

of considerable importance:

“The situation on the platform could admit of many circumstances which

might explain how Mr Vernon came to forget about the PSV or not to

know that it was not in position. The problem for the defenders is that

there is in my view fairly clear eyewitness evidence from which it can be

inferred that in the final period before the accident Mr Vernon was not

aware that the PSV was absent. On the other hand the evidence of what

might have taken place to produce that situation is vague and leads to no

convincing conclusion. Many of the possibilities remain totally

speculative and we shall never know what happened at and following on

the handover. Among the various possibilities the likeliest is that at some

stage in the evening Mr Vernon had suspended or at least seen the PSV

permit but that either in the whole circumstances surrounding the planned

work on the pump it had failed to register in his mind that the stage of the

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valve had any significance or if it did so register it had slipped his mind

later” (Opinion 4/778).

In my view the Lord Ordinary could have regarded the evidence of Bollands,

Clark and Grieve, for instance, as providing a basis for saying that in the minutes before

the disaster Vernon was not acting in a way which suggested that he was aware that PSV

504 had been removed and that there was any risk involved in restarting pump A. In this

respect the Lord Ordinary was entitled, as he did, to have regard to

“the evidence that all the Lead Production Operators and the ordinary

Operators were well aware that it was bad practice to run a pump without

a PSV in place. Indeed there was no suggestion from the considerable

number of qualified workmen who gave evidence that such a thing has

ever been done previously. There is of course always a first time but one

would have to ask why Mr Vernon would have taken a risk” (Opinion

4/763 - 764).

When he refers to the evidence about practice, the Lord Ordinary has in mind the

evidence of a number of witnesses, all with relevant experience.

Perhaps the weakest statement comes from Grieve, who said that he had never

seen a condensate injection pump being run without its relief valve being in position and

that he did not believe that it would have been operating practice to do so (Evidence

62/9354).

The control room operator, Bollands, said that a decision by Vernon to start the

pump knowing that PSV 504 was missing would have been “a drastic step” and he did

not think that Vernon would have done it (Evidence 63/9480). Bollands considered that,

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in any event, if Vernon had contemplated using the pump without a PSV, he would not

have made the decision by himself and, though he would not have required to tell

Bollands, Bollands thought that Vernon would have valued his opinion and so would

have mentioned it to him. Moreover, Vernon would not have made the decision himself

when there were senior production personnel and O.I.M.s on the platform to whom he

could have passed the buck (Evidence 63/9564 - 9566). There was, of course, nothing in

the evidence to suggest that Vernon had consulted anyone about such a proposed course

of action.

Mr. Thomas Henderson was of the view that running a condensate injection

pump without its PSV “just would not be done” and Vernon would not do it: rather than

do it, he would have shut the gas plant down, even if there had been loss of production

(Evidence 79/11817). In cross-examination Henderson was, if anything, even clearer:

he was “positive” that equipment would never be run with a PSV isolated or removed

and that he could conceive no circumstances whatever in which such a thing would have

been done, nor would it have been contemplated by those in charge of the platform.

When asked about a paragraph in the General Safety Procedures manual which seemed

to contemplate the running of equipment where relief valves were isolated by

maintenance, but alternative means of rapid pressure relief were available, Henderson

said that the honest answer was that no system would ever be run without a PSV and he

could only tell the cross-examiner under oath that “no-one on that platform that I knew

would run the system without a pressure safety valve.” He confirmed that this applied to

all the Lead Production Operators (80/11880 - 11886).

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Mr. Joseph Murray also said that at no time would he consider running a

condensate injection pump without its PSV and with a blind flange on the pipework.

While not able to express a view on Vernon’s part, he would assume that a pump would

be run without a PSV only in some dire circumstances and under the approval of the

O.I.M. (Evidence 105/15143 - 15144).

That is a powerful and relatively coherent body of testimony which the Lord

Ordinary was entitled to accept, as he did. Taking that evidence along with the evidence

that Vernon was taking steps to start pump A, without asking anyone about the

advisability of doing so without a PSV in place and without consulting any more senior

person, the Lord Ordinary was also entitled to reach the view that Vernon was not aware,

in the period shortly before the explosion, that PSV 504 was missing.

In reaching that view, he required, of course, to consider the evidence upon

which the defenders relied as the basis of their argument (in the Outer House) that

Vernon would have known that the PSV was missing and so would not have

repressurised the pump. There is no doubt whatever, from the terms of his opinion, that

the Lord Ordinary had that evidence firmly in mind and was well aware of its

significance. What the Lord Ordinary had to do was to decide what weight he gave to

the evidence which pointed to the conclusion that Vernon did not know that PSV 504

was missing, as opposed to the evidence which pointed to the conclusion that he would

have known. In the end the Lord Ordinary attached greater weight to the former and,

given the body of evidence which I have quoted, I consider that he was at least entitled

to do so. Having accepted the evidence that, shortly before the disaster, Vernon did not

know that the PSV was missing, the Lord Ordinary none the less quite rightly did not

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profess to be able to explain on the evidence why this was so. He said that the evidence

of what might have taken place to produce that situation was vague and led to no

convincing conclusion (Opinion 4/778). He had earlier said that the precise cause of

Vernon’s ignorance at the critical time must be at best somewhat conjectural (Opinion

4/751). Again, I see no reason to criticise these conclusions. Since the evidence was of

this nature, at best it could point to “various possibilities”. At different points in his

opinion the Lord Ordinary contemplates a number of these possibilities.

He includes the possibility that Rankin went to the control room but, having been

told that there was no crane available to lift PSV 504, went away with it and neglected to

return with the permit to have it suspended (Opinion 4/750 - 751). As the Lord Ordinary

himself recognises, if this had happened, someone should have noticed that the live

permit had not been cancelled, extended or suspended. In particular, as Lord Sutherland

pointed out during the hearing, after the six o’clock round of extensions and suspensions,

a copy of the permit would have remained on the Lead Production Operator’s desk and it

would have been obvious that it had not been dealt with. The position would surely have

been investigated. Not surprisingly, therefore, the Lord Ordinary does not appear to

attach much weight to this particular possibility and, for my part, I would tend to rule it

out.

The Lord Ordinary selects as “the likeliest” the possibility that, though Vernon

had known about the matter earlier, it had slipped his mind shortly before ten o’clock.

He does so because he tends to the view that Rankin went to the control room at about 6

p.m. and that, at that time, Vernon would have taken over as Lead Production Operator.

If, therefore, Rankin had had the permit to work for PSV 504 suspended, it would have

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been Vernon who suspended it. That being so, Vernon would have been aware of the

permit at about 6 p.m. and must therefore have forgotten it by 9.45 p.m. Of course, it is

somewhat difficult to rank what are admittedly no more than possibilities and one cannot

say that the Lord Ordinary was wrong to prefer this possibility. I should, myself,

however, tend to prefer another possibility: that it was Flook rather than Vernon who

suspended the permit for PSV 504.

In saying that, I have in mind four aspects of the evidence. First, according to

Rankin, at the time when he visited the control room, the only person whom he saw was

the person who dealt with his permit. The evidence suggests, however, that, since there

was a good deal of work going on in the Gas Conservation Module, there would

therefore have been quite a number of permits to be dealt with at about 6 p.m.; there

would have been a correspondingly large number of men in the control room to present

the permits at that time. In general, it is fair to say that the Lord Ordinary had difficulty

with a number of aspects of Rankin’s evidence. In particular he found that Rankin’s

“rather confused version about what took place in the control room is not consistent with

what might have been expected” (Opinion 4/751). Secondly, for what it is worth, Mr.

James McDonald gave evidence which suggested that, by “the back of five-ish” or

“about half-past five, something like that, half-five-ish”, either Sutton or Mr. Jimmy

Rutherford had said to him in the Gas Conservation Module that “the valve was ready,

but it wasn’t going in” (Evidence 76/11324 - 11325). If that is correct, then Rankin must

already have been to the control room by that time. There is, of course, an obvious

question mark over McDonald’s evidence on timings since he appears to be wrong on

the time when the work on PSV 504 actually began earlier that day. Nevertheless, he

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ties his recollection of this particular matter to his recollection of Rutherford waiting to

go on the helicopter to the Tharos at the end of the shift. McDonald was not cross-

examined on this point. Thirdly, while Rankin could definitely have been expected to go

to the control room at about 6 p.m., if his specific purpose had been to suspend the PSV

504 permit at the end of his shift, he in fact went to see whether he could have the

services of a crane that evening. One would expect him to do that as soon as he knew

that the valve was ready to be replaced. So, there is nothing inconsistent with the

general evidence in the idea that he should have been to the control room quite some

time before 6 o’clock. Fourthly, while there was a good deal of evidence about the

length of time which a handover from one Lead Production Operator to another would

take, it is obvious that in practice it must have varied to some degree at least, depending

on what was happening on any particular day. It is therefore not possible to say

precisely when Vernon would have taken over from Flook. For these reasons, I consider

that it is at least possible that the Lead Production Officer whom Rankin saw and who

suspended the permit for PSV 504 was Flook rather than Vernon. On that basis Vernon

would not have come to know about the permit through suspending it. Of course, there

are points to be made against this possibility. In particular the defenders point out that

Flook would have issued the permit for PSV 504 earlier in the day but Rankin said that

he did not know the man to whom he spoke about the crane. Rankin was in general new

to these procedures, however, and I doubt whether he would necessarily have registered

the appearance of the person with whom he had dealt on the earlier occasion - after all,

he would have had no particular reason to do so.

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In stating that I tend to prefer the possibility that Vernon did not suspend the

permit for PSV 504, I am conscious, as was the Lord Ordinary, that I am simply dealing

with one of a number of conjectures. We can never know. The important thing is that,

just as there are a number of possible reasons why one would, arguably, have expected

Vernon to know of the work on the valve, there are also a number of possible reasons

why, arguably, he would not have done so. That being so, there is nothing in the

evidence which required the Lord Ordinary to hold that shortly before the explosion

Vernon must have known that the valve was missing. It was therefore open to the Lord

Ordinary, having taken all the evidence into account, to accept those elements which

pointed to the conclusion that shortly before the explosion, when he was taking steps to

restart pump A, Vernon did not know that PSV 504 was missing. In those circumstances

I am satisfied that there is no proper basis upon which this court could interfere with that

conclusion.

8.6 Failure by Counsel to Clarify Aspects of Grieve’s Evidence

Shortly before the explosion Grieve, who was in the Gas Conservation Module,

heard that pump B had tripped and decided to go down to the 68-foot level to see

whether he could help to restart it. At the proof he gave a fairly detailed account of his

progress through the 68-foot level and past the control panel where there was the button

for resetting the GOVs on the pump. He proceeded towards pump B and at some point

he saw Vernon and Richard to one side of that pump, apparently on a walkway. In some

way he was told that Vernon and Mr. Bob Richard were going to have another go at

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restarting pump B and he accordingly went to the point on the side of that pump where

the start button was situated. When operating the button Grieve would have had his back

towards the area where Vernon and Richard were. It appears therefore that, in order to

see them, Grieve would have had to look back and to his left. The pump failed to start

and Grieve said that he then went round to the other side of the pump to reach the speed

controller. At that point the explosion occurred.

The defenders’ basic argument was that, correctly interpreted, Grieve’s evidence

showed that Vernon had not jagged pump A. If so, then the pursuers’ entire case

collapsed since it depended on the court being able to draw an inference from the proved

facts that Vernon had pressurised the pump. If he had not done so, the condensate would

not have reached the blind flange and there would have been no explosion. In effect,

they said, if Vernon jagged pump A, he must have done so during the time when Grieve

was on the 68-foot level. Grieve did not give evidence of having seen Vernon jagging

the pump and Grieve was not asked by counsel for the pursuers whether he had seen

Vernon doing so. Counsel for the defenders argued that the failure by pursuers’ counsel,

Mr. MacAulay, to ask Grieve whether he had seen Vernon doing this was damaging to

the pursuers’ case since the court could draw the inference that counsel had not asked

this question because he knew that the answer would be damaging. In support of this

submission the defenders relied on various authorities on the nature of circumstantial

evidence and in particular on the passage in W. G. Dickson, A Treatise on the Law of

Evidence in Scotland (third edition, 1887), para. 108(7):

“The conclusiveness of a circumstantial proof is not a sufficient reason for

non-production of attainable direct evidence; and as a party is not likely

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to trust the decision of his case to an inference, when he could prove it

directly, the withholding of the testimony of eye-witnesses impairs the

probative value of a merely circumstantial proof adduced by him.”

The defenders’ junior counsel went so far as to suggest that the failure by counsel

for the pursuers to question Grieve directly on whether Vernon jagged the pump while

Grieve was there made it impossible, as a matter of law, for the Lord Ordinary to hold on

the basis of the available circumstantial evidence that Vernon had jagged the pump.

When he was asked whether this meant that, if the trial had been before a jury, the judge

would have required to direct the jury that they could not find for the pursuers, Mr.

Wolffe qualified his view somewhat. In due course his senior, Mr. Keen, accepted that

he could not go so far as to say that, as a matter of law, the Lord Ordinary could not find

for the pursuers because this particular question had not been put to Grieve. None the

less the failure to put the question impaired the pursuers’ case.

I am satisfied that this submission by the defenders is without merit. The passage

in Dickson’s textbook refers to the situation where a party deliberately withholds the

testimony of eye witnesses. Here nothing like that took place. The pursuers led Grieve

in evidence and questioned him about what he had seen and done on the 68-foot level.

In particular he was asked about the situation when he first saw Vernon and Richard. He

replied (Evidence 61/9290):

“Well, it is a difficult thing to say, if you see people going about functions

that are done routinely, you don’t .... I can’t say I was aware of exactly

what was being done at the time. I can only say that the impression that I

got, followed up by what we actually did, was that they were in the

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vicinity of B Pump and the decision was made to have another go at

starting B Pump as the GOV’s for B Pump were re-latched at that period.

I mean, the only thing I can add, somewhere during that period of time

Bob Richard was called away.”

Grieve was then asked about his communication with Vernon and Richard about trying

to restart pump B and, after that, Mr. MacAulay asked him whether he had seen either

Vernon or Richard while he was working with the start button. His reply as recorded in

the notes of evidence was (Evidence 61/9293):

“As I said, I was aware of Bob Vernon being called away and going up

into C Module.”

It is agreed that the witness was referring to Richard. The impression which Grieve’s

evidence gives is that he was preoccupied with trying to start pump B - which had been

his purpose in coming down to the 68-foot level - and that the only other thing which he

remembered about that time was that Richard had been called away and had gone up to

Module C. His evidence leaves an impression that he could not remember anything

more.

That being Grieve’s position, Mr. MacAulay was entitled to leave the matter

there, presumably on the view - which I consider was justified - that there was nothing in

Grieve’s evidence which was necessarily inconsistent with an inference that Vernon had

jagged pump A while Grieve was on the 68-foot level and concentrating on pump B.

There is no obligation, legal or professional, on a counsel, who considers that he can

establish his case on the basis of the evidence which has already been properly elicited

from a witness, to go further and ask questions to clarify the position. Nor can any

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inference be drawn from his failure to ask those additional questions. On the contrary,

the witness is available for cross-examination by the other side and they may, if they

wish, put the additional questions needed to clarify the point. Here, for instance, counsel

for the defenders could have asked Grieve directly, by means of a leading question if

necessary, whether he saw Vernon jagging pump A or in any position where he could

have been doing so. Doubtless both deliberately and wisely, Mr. Currie chose not to ask

those questions. In argument before us Mr. Keen repudiated any suggestion that the

court would be entitled to draw any inference, from Mr. Currie’s failure to put such

questions, that the answers would have been damaging to the defenders’ case. But such

an inference would be just as legitimate as the inference which Mr. Keen asked us to

draw from Mr. MacAulay’s failure to put the additional questions. In truth, no

inferences as to what Grieve would have said can properly be drawn either way from the

fact that both counsel chose not to question him further in an attempt to clarify his

evidence.

8.7 The Scaffolding Platform

The Lord Ordinary’s ultimate decision on the facts of the case as a whole

depended on a combination of conclusions on various separate chapters of evidence,

much of it highly technical. In the reclaiming motion a large number of those

conclusions were accepted by the defenders - in particular his conclusion that the

explosion was caused by the ignition of a quantity of gas from condensate which had

escaped in the east end of Module C. Because this was disputed at the proof but not in

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the reclaiming motion, the Lord Ordinary heard a vast amount of evidence which we, of

course, did not have to consider. In particular he heard evidence from one of the

scientific witnesses, Dr. Davies, over a period of four weeks. In the hearing before us

counsel for the defenders selected two matters on which Dr. Davies had given evidence

and invited us to differ from the Lord Ordinary’s decision on them. One of these issues

was the question of the possible effect of a scaffolding platform in the vicinity of PSV

504 on the dispersal of any condensate leaking from the site of that valve.

There is no doubt that the presence of the scaffolding platform in the vicinity of

PSV 504 was a factor which the Lord Ordinary required to take into account when

considering the evidence relating to the dispersal of the gas and the sequence in which

the alarms would have been activated. His opinion shows that the Lord Ordinary was

aware of the argument that Dr. Davies had failed to take adequate account of the

presence of the platform when reaching his conclusions. This was, of course, only one

of many areas where the expert scientific evidence could be criticised. Indeed, the Lord

Ordinary says specifically that, in forming his own views, he found the evidence relating

to the actual events on the evening of the explosion more important and more useful than

the expert evidence, precisely because he found the technical evidence somewhat

speculative and often disputed (Opinion 4/856). I therefore see no reason to believe that

the Lord Ordinary overlooked the possible criticisms of Dr. Davies’s opinion or that he

failed to consider those criticisms.

Without going into Dr. Davies’s evidence in detail, I wish to make one, more

general, observation on the position of this court when asked to assess any possible

criticisms of that evidence. A judge’s assessment of individual aspects of an expert

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witness’s evidence will inevitably depend, in part at least, on his overall impression of

the care with which the witness has investigated the matters in question, designed

experiments, considered the issues and presented the evidence. Particularly where, as

here, such a witness gives evidence and is examined and cross-examined over many

days, the judge is bound to form general impressions which he will then apply in

deciding what weight to give to particular parts of the evidence and to criticisms of

particular passages in the evidence. In the case of Dr. Davies, for instance, the Lord

Ordinary remarks that he was “highly experienced in the behaviour of gas”. That was

clearly a factor which the Lord Ordinary took into account - and was entitled to take into

account - when considering whether Dr. Davies had been mistaken in proceeding on the

basis that the leak of condensate would behave in a particular way (Opinion 3/474). I

have little doubt also that the fact that defenders’ counsel attacked him on a particular

technical matter but did not support their criticisms with evidence (Opinion 3/463)

would be liable to influence the Lord Ordinary’s assessment both of Dr. Davies as an

expert witness and of the weight to be attached to other criticisms of his evidence where

the defenders chose to lead no expert evidence of their own. One of the many other

matters on which they did not lead expert evidence was the possible effect of the

scaffolding platform on gas dispersion.

In that situation, it appears to me that it would be particularly invidious for this

court to conclude, as we were invited by counsel for the defenders to conclude, that Dr.

Davies had in effect failed to take proper account of the presence of the scaffolding and

that, had he done so, he would have acknowledged that the results of his experiments

showed that a release of the kind envisaged by the pursuers would have triggered a

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different pattern of gas alarms. The Lord Ordinary plainly took the view that Dr. Davies

had been aware of the existence of the scaffolding platform but had found it difficult to

model it satisfactorily in his wind tunnel experiments. It was for this reason - and not

because he wished to skew his results or overlooked the possible significance of the

platform - that Dr. Davies had not included anything to represent the platform in most of

his experiments. The Lord Ordinary records that Dr. Davies had kept an open mind on

the point (Opinion 3/560). I have no doubt that, in reaching his view on this particular

aspect of Dr. Davies’s evidence and in deciding what conclusions he should draw from

it, the Lord Ordinary would have assessed the criticism of Dr. Davies’s approach on this

particular matter in the context of his overall assessment of Dr. Davies as an expert

witness. That is not an exercise which this court, which was asked to consider only

isolated passages in his evidence, could undertake for itself. For that reason we must

acknowledge that the Lord Ordinary was in a better position than we are to decide the

value to be attached both to his evidence as a whole and to individual parts of his

evidence. Moreover, it has to be remembered that the Lord Ordinary found (Opinion

2/236 – 237) that G101/1, the critical gas alarm, was in fact positioned rather higher (at

about 20 feet above the deck) than Dr. Davies had assumed (about 12 feet) when

designing the model which he used in his experiments. For that reason, it would be

wrong to attach undue weight to the detailed results of those experiments, at least so far

as the triggering of G1/101 is concerned.

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9. NOVUS ACTUS INTERVENIENS

In common with the rest of the court I am satisfied that the Lord Ordinary was

entitled to hold that Sutton failed to fit the blind flange properly and that Vernon, being

unaware that PSV 504 had been removed, introduced condensate into pump A with the

result that it escaped from the improperly fitted flange. In that situation the pursuers

have established that Sutton was negligent and, since he was employed by Score (U.K.)

Ltd., Score would be liable for the consequences of his negligence. On that basis it

might seem that, since the deaths and injuries would not be due to “the sole negligence”

of the pursuers, they would be entitled to recover under the indemnities. In fact,

however, the defenders say that the pursuers are not entitled to recover under the

indemnities because they have not established that the injury to, or death of, the

contractors’ employees was “caused by” Sutton’s negligence in failing to fit the flange

properly. Again, although I have used the heading “Novus Actus Interveniens” which

was the title given by counsel to this segment of their submissions, the ambit of the

arguments was somewhat wider. An account of those submissions is to be found in Part

9 of Lord Coulsfield’s opinion.

It appears to me that the precise question for the court is whether, in terms of the

exception in the indemnity clauses, the injury or death of the contractors’ employees is

properly regarded as having been “caused by” Sutton’s negligence. The argument before

us proceeded, however, on the basis that the pursuers would not be able to recover under

the indemnities unless Score would have been held liable in the law of delict for the

injury and death of the employees. In other words, it was not suggested that the

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negligence of Score’s employee could be regarded as “the cause”, within the meaning of

the indemnity clause, of the injury to, or death of, the employees in circumstances where

Score would not be liable for those injuries and deaths under the law of delict. In effect,

therefore, the defenders’ argument was that, under the law of delict, Score would not

have been held liable for the deaths and injuries since they occurred only because

Vernon subsequently pressurised pump A. This was not a contingency which Sutton

could have been expected to foresee and to guard against; it could properly be regarded

as a novus actus interveniens breaking the chain of causation between any negligence on

the part of Sutton and the deaths and injuries which followed from the explosion.

The framework of this argument must be noted.

First, as Mr. Wolffe explained, the defenders advanced it only in regard to the

situation where the court regarded Vernon as having pressurised the pump when not

aware that PSV 504 was missing. In other words, Vernon had been acting either in

blameless ignorance or, at worst, in ignorance arising out of negligence on his part. If

Vernon had pressurised the pump when he knew that the PSV was missing or had

pressurised it recklessly, then he would have been guilty of “wilful misconduct” and, for

that reason alone, the pursuers would not have been entitled to recover under the

indemnity.

The second point to notice is that before us counsel for the defenders expressly

accepted that there was evidence (for instance, from the Occidental technician, Mr. Ian

Ferguson (Evidence 171/25046)) on which the Lord Ordinary was entitled to conclude

that hydrocarbon could leak past the suction GOVs on condensate injection pump A and

move through the pump and so reach the blind flange. An employee in the position of

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Sutton could therefore have reasonably foreseen that, if the flange were not fitted

properly, hydrocarbon could escape into the atmosphere with a possible risk of injury.

Indeed one at least of the reasons for fitting blind flanges to pipework and tightening

them was to prevent such escapes. Again, this was in line with the evidence (for

example, Mr. Alistair Pirie (Evidence 209/30337) and Mr. Brian Reid (Evidence

107/15495)). The defenders therefore accepted that Sutton had been under a duty of care

to fit the flange properly and that, if death or injury had occurred as a result of

hydrocarbon passing a GOV and escaping at the flange, Score would have been liable in

damages.

Finally, it should be noted that the pursuers did not suggest that an employee in

the position of Sutton could reasonably have foreseen that anyone would try to start

pump A while PSV 504 was away for maintenance.

The argument for the defenders draws a fine line between the kind of case where,

they admit, Score would be liable and the present case. That is not, of course, in itself a

criticism of the argument since fine lines may have an important role to play in particular

aspects of the law. I am, however, satisfied that the defenders’ argument is unsound.

It is well known that, in giving the advice of the Privy Council in The Wagon

Mound [1961] A.C. 388 at p. 425, Viscount Simonds indicated that a wrongdoer’s

“liability (culpability) depends on the reasonable foreseeability of the consequent

damage” and that this liability is to be determined by the foreseeability of the damage

which in fact happened. That test was successfully invoked by the defender when he

was assoilzied in the Court of Session in Hughes v. The Lord Advocate 1961 S.C. 310 at

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p. 323 but the House of Lords allowed the pursuer’s appeal and held the defender liable:

1963 S.C. (H.L.) 31.

The defender in Hughes was the Lord Advocate representing the Postmaster

General and the action arose out of an accident involving Post Office workmen. They

had uncovered a manhole in a road and had erected a canvas shelter over it. They were

working in the space below the road which could be reached by going down a ladder

inside the manhole. The men went away for a tea-break, having closed the flap of the

canvas shelter and having pulled up the ladder which they left on the ground outside the

shelter. Red warning lamps fuelled, as was usual at that period, by paraffin were placed

round the shelter and equipment. In the absence of the workmen, the pursuer and

another boy came upon the site and went into the shelter to explore. They took with

them the ladder and one of the paraffin lamps, which they swung on the end of a rope. It

appears that the boys went down into the manhole and that, when they emerged, the

lamp was either knocked or dropped into the manhole, whereupon a violent explosion

took place which caused the pursuer to fall into the manhole. He suffered severe burning

injuries in the explosion. In the words of Lord Reid (1963 S.C. (H.L.) at p. 38), the

explanation of the accident was “that, when the lamp fell down the manhole and was

broken, some paraffin escaped, and enough was vaporised to create an explosive mixture

which was detonated by the naked light of the lamp”.

The Lord Ordinary held that lighted red lamps, unattended on a public street,

were just the kind of things which attract young children. He also considered that the

open manhole with the canvas shelter would constitute an allurement to children. He

therefore held (1961 S.C. at p. 321) that “the normal dangers of such children falling into

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the manhole or being in some way injured by a lamp, particularly if it fell or broke, were

such that a reasonable man would not have ignored them.” The Lord Ordinary accepted

the expert evidence that the degree of improbability of an explosion of paraffin vapour of

this order as a result of a paraffin lamp being dislodged into the hole was “very high”.

He therefore held that the danger of the pursuer being blown into the manhole and

sustaining burning injuries as a result of the explosion was not one which ought

reasonably to have been foreseen. Under reference to The Wagon Mound, the Lord

Ordinary rejected the pursuer’s claim, saying (1961 S.C. at p. 323) that

“Even if the ordinary dangers of a child playing with a lamp and falling

into an open manhole should have been reasonably foreseen, I do not

consider that injuries resulting from an explosion, such as occurred, could

have been reasonably foreseen.”

This Division, Lord Carmont dissenting, refused the pursuer’s reclaiming motion

on the ground that, since the pursuer suffered his injuries as a result of an explosion

which was in itself unforeseeable, the type of accident was not one which should have

been foreseen by the Post Office workmen.

The House of Lords unanimously rejected such a strict approach to the

requirement of foreseeability. Lord Reid held that “The cause of this accident was a

known source of danger, the lamp, but it behaved in an unpredictable way” (1963 S.C.

(H.L.) at p. 38) and concluded (at p. 40) that

“This accident was caused by a known source of danger, but caused in a

way which could not have been foreseen, and, in my judgment that

affords no defence.”

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Similarly Lord Morris of Borth-y-Gest held (1963 S.C. (H.L.) at p. 44):

“The fact that the features or developments of an accident may not

reasonably have been foreseen does not mean that the accident itself was

not foreseeable. The pursuer was, in my view, injured as a result of the

type or kind of accident or occurrence that could reasonably have been

foreseen. In agreement with Lord Carmont, I consider that the defenders

do not avoid liability because they could not have foretold the exact way

in which the pursuer would play with the alluring objects that had been

left to attract him or the exact way in which in so doing he might get

hurt.”

He summarised his position in this way (1963 S.C. (H.L.) at pp. 44 - 45):

“In my view, there was a duty owed by the defenders to safeguard the

pursuer against the type or kind of occurrence which in fact happened and

which resulted in his injuries, and the defenders are not absolved from

liability because they did not envisage ‘the precise concatenation of

circumstances which led up to the accident.’”

Similarly, Lord Guest held (1963 S.C. (H.L.) at pp. 46 - 47):

“In order to establish a coherent chain of causation it is not necessary that

the precise details leading up to the accident should have been reasonably

foreseeable: it is sufficient if the accident which occurred is of a type

which should have been foreseeable by a reasonably careful person -

Miller v. South of Scotland Electricity Board, 1958 S.C. (H.L.) 20, at p.

34, Lord Keith of Avonholm; Harvey v. Singer Manufacturing Co., 1960

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S.C. 155, at p. 168, Lord Patrick - or as Lord Mackintosh expressed it in

the Harvey case, at p. 172, the precise concatenation of circumstances

need not be envisaged.”

Finally, Lord Pearce (1963 S.C. (H.L.) at p. 48) described the accident as “but a variant

of the foreseeable” and as “an unexpected manifestation of the apprehended physical

dangers”.

I note that in Jolley v. Sutton London Borough Council [1998] 1 W.L.R. 1546 at

p. 1552 Lord Woolf M.R. has confessed to having difficulty in reconciling certain of the

observations of Lord Reid in Hughes with the approach in The Wagon Mound.

Presumably, however, both Lord Reid and Lord Morris, who had been members of the

Board in The Wagon Mound, saw themselves as applying the approach laid down by the

Privy Council to the particular facts of Hughes. In any event, in so far as there might be

any difference in emphasis between the cases, we in this court must be guided by what

was said by the House of Lords in Hughes since their decision is binding on us.

As I have explained, counsel for the defenders accepted that it was reasonably

foreseeable that, if the blind flange were not fitted properly to the pipework,

hydrocarbon might escape and cause injury. They also accepted that it was reasonably

foreseeable that hydrocarbon might pass a GOV and so reach the area of the blind flange.

On the other hand, they argued that it was not reasonably foreseeable that hydrocarbon

would reach the blind flange as a result of human intervention. In particular, it was not

reasonably foreseeable that anyone would try to start the pump while PSV 504 was

missing. So, it was not reasonably foreseeable that hydrocarbon would reach the area of

the blind flange as a result of someone pressurising the pump while attempting to start it.

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In other words what actually happened was not reasonably foreseeable. The defenders

argued that this made all the difference since the fitting of the flange was not intended to

prevent the leakage of hydrocarbon under pressure and so there had been no duty on

Sutton to take steps which would prevent such a leakage: his only duty had been to take

steps to prevent a leak of hydrocarbon due to a valve passing.

As counsel for the pursuers pointed out, however, the Lord Ordinary was fully

entitled to reject such an argument. There was evidence that the flange to be fitted had a

rating of 900 lbs. (Opinion 4/786). Sutton had to flog up the bolts or tighten them with

combination spanners. If fitted properly, the flange would have been able to withstand a

pressure of 2,250 p.s.i.a. The process of repressurising or jagging the pump would have

been intended to produce a much lower pressure (not exceeding 670 p.s.i.a.) within the

pump. If, therefore, jagging caused condensate under pressure to pass into the relief

piping and to leak from the flange, this was something which a fitter in Sutton’s position

could reasonably have foreseen.

This appears to me to be a case where the accident occurred due to a known

source of danger - hydrocarbon escaping because of an improperly fitted flange - but in a

way which could not have been foreseen. The employees were injured in the type of

accident or occurrence - an explosion due to escaping hydrocarbon - which could

reasonably have been foreseen. In these circumstances, if the tests laid down by their

Lordships in Hughes had been applied in any proceedings against Score, then - even

although the precise concatenation of circumstances leading up to the accident could not

have been envisaged - Score would have been liable for the deaths and injuries. In the

words of Lord Pearce, the accident which occurred was “but a variant of the foreseeable”

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and “an unexpected manifestation of the apprehended physical dangers” (1963 S.C.

(H.L.) at p. 48).

Of course, it may well be that the scale of the disaster which occurred was

beyond anything which a reasonable workman in Sutton’s position might have foreseen,

but that does not affect the matter. He could reasonably have foreseen that death and

injury would be liable to result if hydrocarbon escaped from the pipework and gas was

ignited. Which was what happened - though to an appalling degree. In the words of

Lord Reid in Hughes (1963 S.C. (H.L.) at p. 38),

“a defender is liable, although the damage may be a good deal greater in

extent than was foreseeable. He can only escape liability if the damage

can be regarded as differing in kind from what was foreseeable.”

For these reasons I reject the defenders’ first argument.

The other argument advanced on behalf of the defenders was based on the

doctrine of novus actus interveniens. Since this is essentially just another way of looking

at the same problem, it is not surprising that I find myself unpersuaded by this part of the

defenders’ argument also.

We were referred to a number of well-known authorities, most of them dealing

with situations which were rather different from the present case. In particular, several

of them dealt with actings which had been prompted as a response to the defendants’

initial acts of negligence. See, for instance, Haynes v. Harwood [1935] K.B. 146; The

Oropesa [1942] P. 140 and Knightley v. Johns [1982] 1 W.L.R. 349. I do not find it

helpful to analyse those authorities in detail since the present is a rather different kind of

case. On the defenders’ argument, the novus actus consisted in Vernon’s pressurising

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pump A. But Vernon did not pressurise the pump in response to Sutton’s initial act of

failing to secure the blind flange properly; rather, he pressurised the pump - negligently,

as the Lord Ordinary has held - at a time when not merely was he unaware that a blind

flange had been improperly fitted to the end of the pipe, but he was also unaware that

PSV 504 had been removed. It was this combination of the failure of Sutton to fit the

flange properly and of Vernon’s subsequent pressurising of the pump which caused the

hydrocarbon to escape and the disaster to occur. Mr. Batchelor summarised the matter

by saying that in these circumstances the issue was one of contribution between

wrongdoers.

It was, of course, not in dispute that, by repressurising the pump when PSV 504

was missing, Vernon had done something which was likely to endanger the safety or

health of himself and other persons on the platform. Both he and the pursuers were

therefore in breach of Regulation 32 of the 1976 Regulations. For that reason, by virtue

of Regulation 33, actions for damages for the deaths and injuries to the contractors’

employees could have been brought against the pursuers, as the employers of Vernon.

The Lord Ordinary has also found that Vernon was negligent. To escape liability under

the indemnities, the defenders have to show that actions for those self-same deaths and

injuries could not have been brought successfully against Score, even though one of

Score’s employees had negligently failed to fit the blind flange properly and the gas

leaked through the resulting gap. In other words, they have to show that, if actions of

damages had been raised against the pursuers and Score jointly and severally, Score

could have escaped liability simply on the basis that, even although Sutton had been

negligent in failing to secure the flange properly, the explosion would not have occurred

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if the pursuers’ employee, Vernon, had not repressurised the pump, negligently and in

breach of Regulation 32 of the 1976 Regulations.

In my opinion, the defenders cannot show this. Although counsel did not refer us

to it, authoritative guidance on the approach to such questions is to be found in the

speech of Lord du Parcq in Grant v. Sun Shipping Co. 1948 S.C. (H.L.) 73, at pp. 94 -

95:

“If the negligence or breach of duty of one person is the cause of injury to

another, the wrongdoer cannot in all circumstances escape liability by

proving that, though he was to blame, yet but for the negligence of a third

person the injured man would not have suffered the damage of which he

complains. There is abundant authority for the proposition that the mere

fact that a subsequent act of negligence has been the immediate cause of

disaster does not exonerate the original offender. In the well-known case

of Burrows v. March Gas and Coke Co. (1872) L. R. 7 Ex. 96, the

defendant company broke a contract with the plaintiff by supplying him

with a defective pipe, but the immediate cause of an explosion which

caused damage to the plaintiff was the negligence of a third party, a

gasfitter, who, having been called in to look for the source of an escape of

gas, searched for it with a lighted candle. The company was held liable....

In ... The ‘Bernina’ (1887) 12 P.D. 58, at p. 61, Lord Esher, M.R., in the

Court of Appeal, discussed the question ‘what is the law applicable to a

transaction in which a plaintiff has been injured by negligence, and in the

course of which transaction there have been negligent acts or omissions

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by more than one person?’ The learned Master of the Rolls said that upon

many points as to such a transaction the common law was clear, and

stated the first of these points in these words: - ‘If no fault can be

attributed to the plaintiff, and there is negligence by the defendant and

also by another independent person, both negligences partly directly

causing the accident, the plaintiff can maintain an action for all the

damages occasioned to him against either defendant or the other

wrongdoer.’”

See also Miller v. South of Scotland Electricity Board 1958 S.C. (H.L.) 20 at p. 39 per

Lord Denning and H. L. A. Hart and T. Honoré, Causation in the Law (2nd edition,

1985), pp. 205 - 206.

I see no reason to doubt that the approach laid down by Lord du Parcq would fall

to be applied in the present case. On that basis I consider that Score could not have

escaped any liability arising out of the negligence of Sutton by pointing to the undoubted

fact that, even though they were themselves to blame, but for the fault of the pursuers’

employee, Vernon, the contractors’ employees would not have been killed and injured.

The true position is that, in any action for damages brought by the claimants on the basis

of these facts, Score and the pursuers would have been held liable jointly and severally

or severally to the claimants.

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10. SUMMARY AND DISPOSAL

For the reasons given by the other members of the court and for those which I

have indicated in Part 8, I am satisfied that we have no proper basis for interfering with

the Lord Ordinary’s decision on the facts. It follows that I agree with your Lordships

that the defenders’ cross-appeals on the facts should be refused in all of the test cases. In

Part 9 I have held that the defenders’ cross-appeals on the particular matter of novus

actus interveniens should also be refused.

Since I accept the Lord Ordinary’s findings as to the cause of the explosion, I

proceed on the basis of those findings. For the reasons given in Part 2 I would refuse the

defenders’ cross-appeals on the construction of the indemnities. It follows that I am

satisfied that the pursuers have established facts which would be apt to bring them within

the scope of the indemnities. The Lord Ordinary was similarly satisfied, but accepted

the defenders’ argument to the effect that, because the pursuers had been indemnified by

their insurers, six of the test actions were entirely irrelevant, while the action against

Stena Offshore Limited was relevant only in respect of the payments which the pursuers

had themselves made to the claimants. As I explain in Part 1 of the opinion, I consider

that the Lord Ordinary was wrong to accept the defenders’ argument. He was therefore

wrong to sustain the defenders’ (third) general plea to the relevancy in each of the

actions. For that reason I would allow the reclaiming motions insofar as they seek the

recall of the interlocutors assoilzieing the defenders in six of the cases. In the Stena

Offshore case I would recall the Lord Ordinary’s interlocutor to the extent that it restricts

the sum to be awarded to the amount of the pursuers’ own payments to the claimants.

178

I am satisfied also, for the reasons given in Part 3 on Consequential Loss, that the

Lord Ordinary erred in holding that the pursuers would not have been entitled to recover

the so-called Texas enhancement, i.e. the amount of the payments made to the claimants

by reason of the risk that the pursuers would have been vulnerable to the jurisdiction of

the Texas courts. I would allow the pursuers’ reclaiming motions on this point. On the

other hand, as I explain in Parts 4 and 5, I would reject the defenders’ cross-appeals in

which they sought to argue that the court could award only damages which would be

awarded for the claims under Scots law. It follows that I would find the defenders liable

to indemnify the pursuers for the sums which were paid, whether by themselves or by

their insurers, under the settlements reached with the claimants.

Two points concern the Oxy Gap cases only, of which the Stena Offshore case is

an example. The Lord Ordinary reduced the sum which the pursuers were entitled to

recover under the indemnity by an amount representing the benefit which they would

enjoy if, having been given tax relief on the payments made to the claimants, they were

required to pay tax at a lower rate on the sum eventually paid to them under the

indemnities. As I explain in Part 6, I should favour allowing the reclaiming motion to

the extent of indicating that the sum to be paid by the defenders should be under

deduction of an appropriate sum representing any benefit enjoyed by the pursuers as a

result of the tax rates prevailing at the time of payment. On the other hand, in Part 7 I

have rejected the defenders’ argument that the sum to be recovered should be reduced to

take account of the interest payment made to the pursuers by the Inland Revenue under

paragraph 16 of Schedule 2 to the Oil Taxation Act 1975.

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The precise form of the interlocutors in the various cases is a matter upon which

counsel asked to be heard. The calculation of the sums involved, and the precise nature

of the interlocutor in the Stena Offshore case in particular, will require careful

consideration. I therefore move your Lordships to put the case out By Order for the

purpose of hearing counsel’s submissions and of formulating the appropriate

interlocutors in the light of those submissions.

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11. EPILOGUE

It would be wholly wrong to part from these cases without expressing the

gratitude of the court for the assistance which we obtained from the counsel and

solicitors for both parties, first, in the preparation for the hearing of the reclaiming

motion and, later, during the hearing. Inevitably, we were faced with large numbers of

documents and with many authorities. All these were prepared meticulously and

presented to the court at the appropriate time and in an easily assimilable form. The

arguments of counsel were well constructed and well presented. Our clerk and macer

prevented us from being submerged under the volumes of paper. The result of all this

effort was that the reclaiming motion, though it took many days, was conducted in an

efficient manner which did much to alleviate the burden on the court.