Caledonian North Sea Limited v British Telecommunications Plc

The House of Lords considered the construction and effect of cross-indemnity clauses in offshore services contracts (notably clause 15(1)(c)) and whether an operator's insurers, having paid settlements for death or personal injury to contractor employees, could pursue subrogated claims in the operator's name against the contractor. The court held that: (i) clause 15(1)(c) unambiguously gives the contractor a contractual indemnity for injury to or death of its employees irrespective of the contractor's own liability, subject only to the carve-out for the sole negligence or wilful misconduct of the indemnitee; (ii) the operator's insurers, having paid claims, are entitled to be subrogated to the operator's contractual rights of indemnity (the contractual indemnity is a primary liability and the insurer's payment is res inter alios acta as against the contractor); and (iii) the exclusion for "indirect or consequential losses" (clause 21) did not prevent recovery of the excess amounts paid in settlement (above typical Scottish levels) because the payments were compensation for death or personal injury falling within the indemnity.

This consolidated appeal arises from the Piper Alpha disaster (6 July 1988). The operator (Caledonia North Sea Limited) settled large numbers of personal injury and fatal claims brought by or on behalf of persons employed on the platform, many of whom were contractors' employees. The operator and participants sought indemnity from various contractors under contractual indemnities in service contracts; most actions were settled and one test action (Norton (No 2) Ltd) proceeded to the House of Lords.

The issues framed for determination were:

• whether clause 15(1)(c) should be construed to require the contractor to have been liable at common law or for breach of statutory duty before the indemnity arose;
• whether the operator (having been indemnified by its insurers) or the operator's insurers could enforce the contractual indemnity against the contractor (i.e. subrogation and whether insurance payments discharged the contractor's liability); and
• whether clause 21 excluding "indirect or consequential losses" prevented recovery of the excess over Scottish-law levels in the settlements.

The House of Lords gave a unified answer. On construction the court rejected the contractor's implication that the indemnity only applied where the contractor was itself liable: the clause as drafted plainly imposed an indemnity for injury to or death of contractor employees "irrespective of any contributory negligence" except where caused by the sole negligence or wilful misconduct of the indemnitee. On subrogation and insurance the court held that the contractual indemnity was a primary commercial allocation of risk; the operator was not obliged to insure and the operator's voluntary insurance was res inter alios acta as between contractor and operator. Consequently insurers who paid were entitled to be subrogated to the operator's rights and sue in the operator's name. Finally, on consequential loss the court held the excess paid in settlement remained compensatory for death or injury and therefore within the indemnity; clause 21 did not exclude such sums.

Procedurally, the case reached the House of Lords after proof in the Court of Session (Lord Ordinary) and appeal to the Inner House which allowed the reclaiming motion; the House of Lords dismissed the contractor's appeal. The court emphasised commercial practice in the offshore industry, the primacy of contractual allocation of risk and long-standing principles of subrogation.

This was an appeal from the Court of Session. The House of Lords dismissed the appeal. The court held that (1) clause 15(1)(c) must be construed as an indemnity for death or injury to the contractor's employees irrespective of the contractor's own liability except where the loss was caused by the sole negligence or wilful misconduct of the indemnitee; (2) the operator's insurers who paid settlements were entitled to be subrogated to the operator's contractual right of indemnity and to enforce it in the operator's name because the contractual indemnity was a primary liability and the operator's voluntary insurance was res inter alios acta as against the contractor; and (3) the consequential loss exclusion (clause 21) did not bar recovery of the excess paid in settlement as compensation for death or injury within the indemnity.

Proof in the Court of Session before the Lord Ordinary (Lord Caplan) concluded 31 October 1996; Lord Ordinary issued opinion 2 September 1997 (refusing the operator's claims). The operator reclaimed to the Inner House (First Division) which heard argument in October 1998–April 1999 and issued opinions on 17 December 1999, allowing the reclaim and ordering recovery of the sums: [2000] SLT 1123. The matter then proceeded to the House of Lords which dismissed the contractor's appeal on 7 February 2002: [2002] UKHL 4.