Deepak Fertilisers & Petrochemical Ltd v Davy McKee (UK) London Ltd

A contractual obligation to communicate proprietary improvements may cover plant-specific design modifications developed from operational experience. Information about a risk does not itself constitute an improvement unless translated into a design, construction or operational feature.

In adversarial proceedings, a party generally cannot impugn a witness’s evidence without putting the material challenge in cross-examination. Although the trial judge remains responsible for finding the facts, fairness requires caution before rejecting unchallenged evidence without alerting the parties.

Operational conduct breaks the chain of contractual causation only where it amounts to reckless disregard of the relevant risk. Mere failure to respond to abnormalities does not suffice where the operator lacked knowledge of the danger that materialised.

An explosion destroyed part of the appellants’ methanol plant in India. The respondents had licensed the manufacturing process and were contractually required to communicate qualifying improvements. They failed to disclose a plant-specific heat-exchanger by-pass developed in response to overheating experienced during commissioning.

HHJ Toulmin CMG QC in the Technology and Construction Court found a breach of contract but dismissed the claim because he was not satisfied that the appellants would have installed the by-pass before the explosion. He awarded the respondents £230,847 on their counterclaim for unpaid invoices.

The appellants challenged the findings on causation, damages and the counterclaim. The respondents cross-appealed on breach and contended that the plant operators’ recklessness had broken the chain of causation. The central questions were whether the undisclosed measures were contractual improvements, whether disclosure would have prevented the explosion, and whether the operators’ conduct constituted an intervening cause.

1. Appeal allowed unanimously. Latham LJ delivered the leading judgment. Brooke LJ agreed, and Hart J agreed subject to a qualification immaterial to the result.
2. The shortening of core rods and installation of a heat-exchanger by-pass were plant-specific design features developed after assessing the plant’s performance. They formed part of the respondents’ know-how and were improvements of a proprietary nature within the contract. The respondents breached their obligation by failing to communicate them. Per Latham LJ, information about the risk of methanation was not itself an improvement because it had not been translated into a design, construction or operational feature. Hart J considered that knowledge might in principle qualify without such translation, but the fax relied upon contained only an untested hypothesis.
3. The trial judge’s adverse causation finding could not stand. In adversarial proceedings, a party should ordinarily put a material challenge to the opposing witness in cross-examination. A judge may determine any issue that remains live, but should be slow to reject unchallenged evidence on credibility or reliability without first clarifying the parties’ positions. The judge misunderstood the distinction between evidence about replacing the converter and evidence about installing a by-pass. He also overlooked the existing shutdown and availability of replacement catalyst.
4. The only proper finding was that, had the by-pass been disclosed, it would probably have been installed during the shutdown. It was effectively common ground that this would have controlled the overheating and prevented the methanation that caused the explosion.
5. Applying the approach in County Ltd v Girozentrale Services [1996] 3 All ER 834, the chain of causation would be broken only by reckless disregard of the relevant risk. The appellants did not know that methanation could occur, while the respondents’ own expert regarded its occurrence in such a converter as unprecedented. The operators’ response to abnormal conditions therefore did not amount to recklessness.
6. The appellants recovered RS105,989,364 plus interest for reconstruction and the initial catalyst charge. The additional financing and catalyst-cost claims remained unproved. On the counterclaim, the respondents bore the burden of proving the disputed invoices; the absence of a contemporaneous objection did not reverse that burden. Recovery was reduced to the admitted £50,000 plus interest.

1. Court of Appeal (Civil Division): In the present decision, [2002] EWCA Civ 1396, the court unanimously allowed the appeal, entered judgment for RS105,989,364 plus interest and reduced the counterclaim to £50,000 plus interest.
2. Technology and Construction Court: HHJ Toulmin CMG QC found a breach of contract but dismissed the damages claim for want of causation. He entered judgment for the respondents for £230,847 on their counterclaim. No citation is stated.
3. Earlier Court of Appeal proceedings: On preliminary issues reported as Deepak Fertilisers & Petrochemical Corporation v ICI Chemicals and Polymers Ltd & Others [1999] 1 Lloyd’s Rep 387, the court confined the appellants to a contractual claim against the present respondents under article 10.5.3 and excluded consequential loss, including loss of profits.