Shell UK Ltd & Ors v Total UK Ltd & Ors

An indemnity for a party’s own negligence must be found in the language of the relevant agreement, construed with the contractual scheme as a whole. General guidance on negligence clauses requires care where the contractual history shows that such an indemnity was contemplated. Express treatment of negligence elsewhere may make silence in the clause deliberate. A beneficial owner of damaged property may recover foreseeable economic loss even without possession, provided the legal owner is joined. The legal or possessory title rule for relational economic loss does not bar that claim. Conditional, scheduled or discretionary access to shared property does not confer possession or an immediate right to possession.

The appeals arose from preliminary issues decided by David Steel J after the Buncefield oil-terminal explosion. The judge held Total vicariously liable, rejected Total’s claim to an indemnity for its own negligence, treated Total UK Limited as a participant in the joint venture, and dismissed Shell’s claim for consequential economic loss. Total appealed on the indemnity issues; Chevron cross-appealed on Total UK Limited’s participant status; and Shell appealed on beneficial ownership, possession and recovery for economic loss. The central questions were whether the contractual arrangements supplied an indemnity and whether Shell could recover despite lacking legal title or possession.

Disposition. Total’s appeal and Chevron’s cross-appeal were dismissed. Shell’s appeal was allowed to the extent of declaring that Shell could recover as beneficial owner for its provable economic losses. A formal order was to be drawn up.

1. Contractual indemnities. The court held that it was unnecessary to decide precisely whether the Management Agreement had been tacitly extended to operational activities. Total had to identify the contractual provision conferring an indemnity, and all agreements had to be construed together as they stood at the date of the explosion. The guidance in Canada Steamship Lines Ltd v R [1952] AC 192 applied to indemnities, but required care because indemnification for the indemnitee’s own negligence had previously been contemplated in related contracts. Where detailed agreements expressly addressed negligence elsewhere, its omission from the clause in question was likely deliberate.
2. Clause 7.1.2 of the Management Agreement, if applicable, excluded loss caused by the manager’s own negligence. Paragraph 1.3 of section III of the Operating Regulations indemnified participants as participants, not as operators, and did not expressly cover the indemnified party’s negligence. The accounting provision designed to ensure that the operator neither gained nor lost did not alter that construction. Clause 9.2 of the original Joint Venture Agreement was redundant once the Operating Regulations governed the sharing arrangement. The proposed variation of the Management Agreement was not proved: correspondence expressing a lawyer’s agreement, without client confirmation or a written amendment, was insufficient. Total therefore had no contractual indemnity.
3. Participant status. Total UK Limited became a permitted assignee and participant. The sale agreements transferred the relevant beneficial interests and contractual rights, and Chevron’s agreement to the notification of 2 December 2005 supplied the necessary consent. No further deed or legal transfer was required to transfer the contractual benefit, although legal transfers remained relevant to matters such as land and shares. Chevron’s cross-appeal consequently failed, and Total UK Limited could rely on paragraph 1.1 of section III as a knock-for-knock bar to Chevron’s claim.
4. Shell’s economic loss. The general exclusionary rule, described in Leigh and Sillavan Ltd v Aliakmon Ltd (The Aliakmon) [1986] A.C. 785, ordinarily requires legal ownership or possessory title before recovery for damage to property causing economic loss. It did not determine the position where the claimant was a beneficial owner and the legal owner was joined. The court accepted that a trustee or legal owner could recover loss suffered by a beneficiary without double recovery, relying on the reasoning in Chappell v Somers & Blake [2004] Ch 19 and the analogous reasoning in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co. Ltd [1988] 2 Lloyd’s Rep 505. Shell could therefore recover foreseeable consequential loss, including additional expenditure and lost profit, despite lacking possession.
5. Possession and alternative torts. The contractual arrangements gave Shell only regulated and conditional use of the pipelines. The monthly movement programme and WLPS’s discretion were inconsistent with possession or an immediate right to possession; actual possession lay with BPA, whose employees controlled physical access. The court did not decide the alternative nuisance and Rylands v Fletcher claims, observing that recovery under those heads might be surprising if the negligence claim failed.

• Court of Appeal (Civil Division): In [2010] EWCA Civ 180, Total’s appeal and Chevron’s cross-appeal were dismissed. Shell’s appeal was allowed to the extent of a declaration concerning recovery by a beneficial owner.
• Queen’s Bench Division, Commercial Court: David Steel J decided the preliminary issues in [2009] EWHC 540 (Comm). He held Total vicariously liable, rejected Total’s indemnity case, found Total UK Limited to be a participant, and dismissed Shell’s claim for consequential economic loss.