Caledonia North Sea Limited etc

An offshore services contract may allocate responsibility for employees’ death or injury to their employer regardless of fault. Clear words providing that allocation govern, subject to any express exception.

Where such a contractual indemnity is primary, voluntary insurance obtained by the protected party is a secondary obligation. Payment by the insurer does not discharge the indemnifier. The insurer may enforce the contractual indemnity by subrogation in the insured’s name.

An exclusion for indirect or consequential loss does not ordinarily exclude a reasonable settlement of the liability expressly covered by the indemnity. A higher quantum resulting from a credible foreign claim remains compensation for the same death or injury.

The consolidated appeals arose from the Piper Alpha disaster. The platform operator and its insurers settled death and personal injury claims, including claims concerning contractors’ employees. The operator then sought contractual indemnities from the contractors.

The Lord Ordinary rejected the claims. The First Division allowed the operator’s reclaiming motion, refused the contractors’ cross-appeal and awarded the settlement sums: [2000] SLT 1123. All but the Norton (No 2) Ltd appeal were settled before the House.

The remaining questions concerned the construction of the employee indemnity, the effect of payment by the operator’s insurers, and whether the excess over Scottish damages levels was excluded as indirect or consequential loss.

1. Disposition. The House unanimously dismissed the Norton (No 2) Ltd appeal with costs. The other six cases were remitted to the Inner House to give effect to settlements. Lord Bingham, Lord Nicholls, Lord Hoffmann and Lord Scott agreed with Lord Mackay’s conclusion.
2. Construction of the indemnity. Per Lord Mackay, Lord Bingham and Lord Hoffmann, clause 15(1)(c) clearly required the contractor to indemnify the operator for claims arising from death or injury to the contractor’s employees. The contractor’s own negligence or breach of statutory duty was unnecessary. The exception for the operator’s sole negligence or wilful misconduct marked the limit of the indemnity. The introductory general indemnity did not restrict the five specific heads that followed. The words “contributory negligence” meant negligence contributing to the loss, contrasted with sole negligence. This construction reflected the offshore industry’s allocation of employee risks through mutual indemnities.
3. Subrogation and primary liability. Per Lord Mackay, with Lord Bingham and Lord Hoffmann concurring, payment by the operator’s insurers did not discharge the contractor’s indemnity. The critical inquiry was which obligation was primary. The contract did not require the operator to insure for this liability or make the contractor a beneficiary of that insurance. The insurance was therefore res inter alios acta, while the contractor’s express indemnity allocated primary responsibility. The insurers’ obligation was secondary, and they could enforce the operator’s contractual right by subrogation in its name. This applied the principle illustrated by Mason v Sainsbury (1782) 3 Dougl 61.
4. Co-ordinate indemnities. Per Lord Mackay and Lord Hoffmann, contribution rather than subrogation applies where liabilities are genuinely equal and co-ordinate, as with insurers covering the same interest and risk. The contractor’s indemnity and the operator’s voluntary insurance were intrinsically different and were not co-ordinate.
5. Consequential loss. Per Lord Mackay, Lord Bingham and Lord Hoffmann, the additional amount paid because of the credible prospect of Texas proceedings remained compensation for death or injury. It was not indirect or consequential loss under clause 21. Lord Hoffmann additionally held that clause 21 concerned losses caused by breach of contract and did not govern an indemnity for liability incurred outside the contract. The reasonable settlement fell within the indemnity.

1. House of Lords: The Norton (No 2) Ltd appeal was dismissed with costs. The six settled appeals were remitted to the Inner House.
2. Inner House of the Court of Session: The First Division allowed the operator’s reclaiming motion, refused the contractors’ cross-appeal and ordered payment of the settlement sums: [2000] SLT 1123.
3. Outer House of the Court of Session: The Lord Ordinary refused the operator’s claims on 2 September 1997 and later found no expenses due to or by either party.