INTERNATIONAL ARBITRATION 1/3LY
Implied Terms In the case of Marks and Spencer v BNP Paribas [2015] UKSC 72, the Supreme Court considered the test for implying terms into a contract. Lord Neuberger held that the judgment in the earlier Privy Council case of Attorney General of Belize v Belize TelecomLtd [2009] UKPC 10 should not be read as having watered down the traditional, highly restrictive, tests for implying a term. The court held, instead, that in assessing whether it is appropriate to include an implied term into a contract, the court should first construe the express words used, and then decide whether a term should be implied. Furthermore: • A termwill only be impliedwhere it is strictly necessary for business efficacy; • It is not enough that the parties would have agreed to it had it been suggested to them. That is a necessary but insufficient ground for implying a term; • The test is not one of absolute necessity but whether, without the term, the contract would lack commercial or practical coherence; and • A termwill not be impliedwhere it ‘lies uneasily’ with the express terms in the contract. Indirect and Consequential Damages Finally, no overview of recent case lawwould be complete without mentioning the Court of Appeal’s decision a fewmonths ago in Transocean v Providence [2016] EWCA Civ 372. Providence had contractedwith Transocean for the supply of a semi-submersible drilling rig for a drilling contract in the Irish Sea. A dispute arose between the parties and Providence claimed, among other things, that it was entitled to recover its wasted spread costs as a result of Transocean’s alleged breaches of contract. The spread costs involvedwere significant, and consisted of the costs of personnel, equipment, and services contracted from third parties which were wasted as a result of the delay. These includedwell logging; well testing and cementing; and mud engineers. Following a trial at the High Court in London in 2014, Mr Justice Popplewell made a ruling in relation to the interpretation of the consequential loss provisionwhich had far reaching consequences for the industry. In a nutshell, and to the surprise of most, he ruled that “spread costs” were not excluded by the consequential loss provision. As a result of this initial decision, the industry sawa significant increase in claims for spread costs. Transocean appealed, and the Court of Appeal reversed the decision of Mr Justice Popplewell in relation to consequential loss. The clause in questionwas the standard LOGIC Form, with a few relativelyminor changes. The key part of the consequential loss provision in section 20 of the Contract was: “ . . . loss of use (including, without limitation, loss of use or the cost of use of property, equipment, materials and services including without limitation, those provided by contractors or subcontractors of every tier or by third parties), loss of business and business interruption...”.
The facts in the case of Arnold v Britton and others [2015] UKSC 36 is of little relevance to the oil &gas industry. What is important is the leading judgment by Lord Neuberger, where he stated that when interpreting awritten contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge whichwould have been available to the parties would have understood them to be using the language in the contract tomean” – Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, para 14. He went on to state: “This the court does by focussing on themeaning of the relevant words, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinarymeaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions.”. Lord Neuberger then dealt with the issue of common sense. Whilst it is a factor, it should not be used to undermine the importance of the language actually used in the contract. Where a clause is badly drafted, the court will more readily depart from its natural meaning. However, the court should not seek out problems with the drafting of a contract solely to justify departing from its natural meaning. Commercial common sensemust be assessed as at the date the contract was entered into, and should not be invoked retrospectively only once it has become clear that the bargain “has worked out badly, or even disastrously, for one of the parties”. The court should be slow to reject the natural meaning of a termmerely because it appears to have been an imprudent term to have agreed, even at the time of entering the contract. Surrounding factual circumstances may only be taken into account to the extent that theywere known or reasonably available to both parties. In language that will resonate with anyone drafting oil &gas contracts, Lord Neuberger stated: “[T]he parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the partiesmust have been specifically focussing on the issue covered by the provisionwhen agreeing the wording of that provision . . . it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party. “.
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