Construing payment obligations on breach of contract

Summary: Where disputes occur and losses arise, questions of construction are frequently close behind. Transocean Drilling UK Limited -v- Providence Resources PLC (The Arctic III) [2014] EWHC 4260 (Comm) demonstrates the court's approach to construction and, in particular, looks at the effect of breach on contractual payment obligations. The overall message is another reminder of the need for express wording if the intention is to remove a party's legal rights.

Background: This dispute concerned the drilling of an appraisal well in the Barryroe Field off the south coast of Ireland. Various problems with the rig provided by the claimant (Transocean) to the defendant (Providence) led to a delay in operations between 18 December 2011 and 2 February 2012. Transocean claimed payment at the contractual rate, which Providence disputed for the period of delay caused by Transocean's breach. Providence also sought to set off its counter-claim for wasted costs.

Payment generally depends on performance. Three well-known principles supported Providence's argument that payment was not due on those days when the rig was out of action:

• a party will not be able to take advantage of its own breach of contract unless there is clear language to the contrary (Alghussein Establishment -v- Eton College [1988] 1 WLR 587);
• where an exemption clause is capable of applying to negligent and non-negligent breaches, the presumption is that liability for negligence will not be excluded unless the clause makes this clear (Canada Steamship Lines -v- The King [1952] AC 192); and
• on a breach of contract, the remedy of abatement exists to allow the buyer of goods or services to defend a claim for the price by showing how much less those goods or services are worth by reason of the breach (Gilbert-Ash (Northern) Limited -v- Modern Engineering (Bristol) Limited [1974] AC 689).

Canada Steamship and Gilbert-Ash were cited in another case dealing with a rig contract, Sonat Offshore SA -v- Amerada Hess [1998] 1 Lloyds Rep 145. Here, the basic point was made that parties in a commercial world are highly unlikely to agree to pay for goods or services which are not provided, particularly where the supplier has been negligent or is in breach. An obligation to make regular, ongoing payments throughout the term of the contract regardless of performance should be set out expressly. Absent express wording, an obligation to pay without proper performance will only be inferred if there is no other reasonable alternative. Therefore, if a company hires a rig and is deprived of all benefit of it due to the contractor's breach, it will not be obliged to pay for it without any right of reduction, set-off or counter-claim unless the terms of the agreement clearly say so. This requirement may be watered down slightly to reflect industry practice but it remains relevant. The judge also mentioned that structuring payment obligations as being in return for work rather than by reference to time intervals "is indicative that the right of abatement is preserved and the obligation is only to pay for work being performed". Under the contract, invoices calculated on the basis of the relevant day rates were to be submitted monthly and credit notes would be issued in relation to any disputed items. There was nothing in the wording of the relevant clauses to make it clear that Transocean was entitled to be paid at the appropriate day rate when the rig was not performing due to Transocean's breach.

Presumption that remedies will not be readily given up. The court also examined the exclusion of consequential loss. It was held that, in theory, a clause such as this could operate to preclude any right of set-off, since the right cannot arise where there is no recoverable claim to set-off - "a damages claim which is excluded by contract is no claim at all". One aspect of the parties' dispute focused on the meaning of "loss of use" in the context of the various other heads listed in the clause. The court's approach was to construe the clause contra proferentem against Transocean, notwithstanding that it contained mutual exclusions and indemnities, on the basis that any party relying on an exclusion clause must establish a clear intention to deprive the other party of a remedy to which he would otherwise be entitled, because "one starts with the presumption that neither party intends to abandon any remedies … arising by operation of law, and clear words must be used in order to rebut that presumption". This narrow construction was supported by the fact that other types of loss were specifically identified and therefore distinct from "loss of use". On Transocean's contended wide construction, the exclusion would cover all losses which Providence might conceivably suffer, thereby removing any meaningful sanction for non-performance. This did not sit comfortably with other detailed terms concerning the condition of the rig which were clearly intended to be legally enforceable.

Please click on the links below for the other articles in the February 2015 commercial contracts newsletter:

• Higher standard of care expected from specialist provider
• Court of Appeal confirms decision on repudiatory breach
• The importance of clear wording regarding "direct/indirect loss"
• Liquidated damages, penalties and the dangers of renegotiating the contract price
• Ensuring entire agreement clauses are fit for purpose
• Personal guarantor bound by signature machine