DEEPAK FERTILISERS AND PETROCHEMICALS CORPORATION v. ICI CHEMICALS & POLYMERS LTD. AND OTHERS

Clear exclusion and indemnity clauses in a negotiated commercial contract must be given their ordinary meaning. A court must not adopt a strained construction merely because the allocation of risk is severe.

A contractual acceptance letter may itself establish, or dispense with insistence on, a condition for release. The resulting release is confined to the contractual liabilities which it covers.

An indemnity to hold a third party harmless may imply a promise not to sue that party. A contracting party may obtain a stay of proceedings brought in breach of that promise if it has a real interest in enforcement. An exclusion of indirect or consequential loss does not exclude loss which arises directly and naturally from the breach, unless the contract expressly excludes that head of loss.

Deepak Fertilisers and Petrochemicals Corporation v Davy McKee (London) Ltd and another concerned claims exceeding £100 million following the explosion of a methanol plant in India. Deepak alleged breach of contract, negligence, negligent misrepresentation and collateral warranties against Davy and ICI.

Rix J determined ten preliminary issues concerning the construction of the process-licence contract, including acceptance, exclusions, indemnities, insurance, the protection of ICI, and recoverable losses: (1998) 2 LLR 139. Davy appealed some answers; Deepak appealed others; ICI supported Davy on the principal indemnity issues.

The central questions were the scope and effect of the contract's release, exclusion, indemnity and co-insurance provisions.

1. The Court delivered a single judgment to which all three members contributed. It determined the cross-appeals by accepting Davy's principal contentions on release and exclusion, accepting Deepak's contentions on co-insurance and consequential loss, and dismissing Deepak's appeal concerning the stay of proceedings against ICI. The formal order recorded: “Appeal dismissed”.

2. Following Photo Production v Securicor Ltd [1980] AC 827, clear exclusion clauses in a commercial contract between parties able to protect their interests must not receive a strained construction. The parties' chosen risk allocation was therefore to be given effect according to its language.

3. The acceptance letter issued under article 7 established that the performance-test condition for release had been fulfilled or was not insisted upon. Its reference to minor malfunctions did not qualify the acceptance as a whole. It released Davy from contractual liabilities, but not negligence or collateral-warranty claims, and not post-acceptance obligations under article 10.5.3.

4. Article 6.8 excluded Davy's liability in tort for negligent misrepresentation arising from its contractual performance. Article 10.16 excluded liability on a collateral warranty, but did not exclude liability for misrepresentation. Together with the article 7 release, those conclusions left Davy under no pleaded liability.

5. Article 10.10.2 did not indemnify Davy against its own express contractual breaches. It did, however, cover liability for damage to Deepak's property arising from negligence, negligent misrepresentation and collateral warranty, without an implied temporal limit. Davy had an insurable interest in the plant during construction and commissioning, but after completion it could insure only its potential liability, not the plant itself. It therefore had no relevant property-insurance interest when the plant exploded, and the co-insurance term afforded no defence.

6. An agreement to indemnify and hold ICI harmless necessarily implied a promise by Deepak not to sue ICI. Applying the equitable jurisdiction explained by the earlier authorities, Davy had a sufficient interest to enforce that promise because ICI had made a non-obviously-bad indemnity claim against it. A stay properly extended to Deepak's whole claim against ICI within article 10.10.3.

7. Under article 6.8, wasted overheads during reconstruction and the additional catalyst cost were direct losses, not indirect or consequential losses. Croudace Construction Ltd v Cawoods Concrete Products Ltd [1978] 2 Lloyds Rep. 55 was binding on that point. Lost profits were excluded expressly, whereas the reconstruction cost remained recoverable.

• Court of Appeal (Civil Division) Determined Davy's and Deepak's appeals from the preliminary-issue rulings. It varied the construction reached below on several issues and formally recorded that the appeal was dismissed.

• Commercial Court (Rix J) Determined ten preliminary issues concerning the contract: (1998) 2 LLR 139.