BP Exploration Operating Company Ltd v Kvaerner Oilfield Products Ltd & Anor

Where a commercial contract contains apparently conflicting provisions, the court must identify the meaning mutually intended by the parties from the words used and their relevant background. Departure from the ordinary meaning requires cogent grounds. A more commercially reasonable outcome is insufficient, and business common sense is relevant only where the ordinary meaning would make the bargain commercially impossible or show that something has gone wrong with the language.

Specific insurance provisions may prevail over broader or apparently limiting introductory wording. An operator’s contractual obligation to procure project insurance for a contractor can therefore require cover co-extensive with the operator’s own cover.

BP claimed damages from Kvaerner for allegedly defective subsea equipment and pursued a related contribution claim against Cooper Cameron (UK) Ltd. The preliminary issues concerned whether BP’s Construction All Risks policy, including its waiver of subrogation, protected Kvaerner and CCL against the losses claimed.

The central question was whether the insurance obligations in the Kvaerner and CCL development contracts were limited by introductory wording concerning attendance after manufacture and delivery, or whether they required BP to procure cover co-extensive with that available to BP as Principal Assured.

1. Construction of commercial contracts. The court must ascertain the meaning which the words would convey to a reasonable person with the relevant background knowledge. The words actually used and their ordinary meaning ordinarily provide the foundation for contractual certainty. Departure from that meaning is rare and requires cogent grounds. A different construction is not justified merely because it appears more reasonable or fair commercially to one or both parties.
2. The business-common-sense principle applies where the ordinary meaning would flout business commonsense or the language shows that something has gone wrong. It is not a free-standing licence to rewrite an unwise bargain. The approach in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 and Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 informed that analysis.
3. Although clause 10.5’s opening wording could support BP’s narrower construction, clause 10.5(b), the Notes on Insurance and the contractual allocation of risk contained strong and specific indications of co-extensive cover. The disparity between the opening wording and the insurance provisions displaced the inference arising from the clause’s layout and syntax. Clause 10.5(b) was therefore a free-standing provision, not controlled by the opening wording.
4. BP was obliged to provide Kvaerner with the benefit of a Construction All Risks policy co-extensive, so far as the performance of Kvaerner’s contractual obligations was concerned, with the cover available to BP as Principal Assured. The materially equivalent CCL provision had the same effect. Kvaerner and CCL were accordingly entitled to the benefit of the relevant cover and waiver of subrogation.
5. In an alternative observation, the court applied National Oilwells (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyd’s Rep. 582: an unidentified Other Assured obtains cover only to the extent that the operator has undertaken by contract to procure it. Mere intention is insufficient.

First-instance determination of preliminary contractual and insurance issues in the High Court (Commercial Court). No appellate history was stated in the judgment.