Seadrill Management Services Ltd & Anor v OAO Gazprom

A contractual obligation to perform services ordinarily includes the legal incident that they will be performed with reasonable skill and care, unless the parties clearly agree otherwise. Risk-allocation and indemnity clauses must be construed according to their precise scope and in the context of the contract as a whole. They do not displace liability for breach outside the specified classes of loss.

A sound-location indemnity applies where a hazardous or defective site condition directly causes the relevant damage. It does not apply merely because negligent operation leaves equipment improperly positioned on an otherwise satisfactory site. Once the required direct link is established, a clause allocating liability regardless of cause may exclude further causation enquiries.

Seadrill owned and operated a jack-up drilling rig supplied to Gazprom under an offshore daywork drilling contract. During pre-loading, the master and crew negligently continued uneven ballasting. The rig became improperly aligned and was damaged, although the seabed behaved as predicted and was capable of providing stable support.

Flaux J held in the Commercial Court, [2009] EWHC 1530 (Comm), that Seadrill was obliged to operate the rig with reasonable skill and care. He rejected Seadrill’s argument that the contract allocated the resulting losses to Gazprom regardless of negligence.

Seadrill appealed on contractual construction. The central issues were whether the contract excluded an obligation of reasonable skill and care, whether its risk-allocation provisions transferred the loss to Gazprom, and whether the seabed indemnity applied.

1. The appeal was dismissed unanimously. Paragraph 502 imposed an obligation on the contractor to operate the rig. That express obligation included the ordinary legal incident that the work would be performed with reasonable skill and care. The same incident arose under section 13 of the Supply of Goods and Services Act 1982. The contract contained no sufficiently clear agreement excluding it.
2. Paragraph 501 did not allocate every operational loss to the operator. Its first three sentences established daywork remuneration and limited the contractor’s obligations and liabilities to those arising under the contract. Those obligations included the ordinary incidents attached by law. Its fourth sentence placed other expenses and losses on the operator, but remained subject to the contractor’s expressly assumed obligations and liabilities.
3. Parties do not ordinarily surrender valuable legal rights without clear language. The contract therefore could not be approached on an assumption that its risk-allocation provisions supplanted the parties’ substantive obligations. Earlier versions of a standard form are generally of little assistance where the reason for an amendment and the parties’ awareness of it are unproved. The operative contract must be construed on its own terms against the commercial background existing when it was made.
4. Paragraph 701 required hire to be paid during the contract despite an actionable wrong by the contractor. It did not prevent the operator from later recovering that hire as damages for breach. Article IX and paragraphs 910 and 911 allocated specified classes of loss regardless of cause. They did not create a comprehensive code displacing ordinary contractual remedies for losses outside those classes.
5. Paragraph 606 was a sound-location provision and an exception to the contractor’s responsibility for damage to the rig. It concerned hazardous or defective characteristics of the drilling site. Its protection required a direct link between a specified site condition and the damage claimed. Once that link existed, further questions of causation became irrelevant under paragraph 911.
6. The seabed was satisfactory, stable and predictable. The sole cause of the casualty was the crew’s negligent handling of the rig. There was no direct link between any hazardous seabed condition and the damage. Paragraph 606 therefore did not transfer responsibility to Gazprom.

1. Court of Appeal (Civil Division): The court dismissed Seadrill’s appeal unanimously and affirmed the relevant conclusions of Flaux J: [2010] EWCA Civ 691.
2. High Court, Queen’s Bench Division (Commercial Court): Flaux J held that Seadrill was obliged to operate the rig with reasonable skill and care, that the contractual risk-allocation provisions did not exclude liability for the resulting breach, and that the sound-location provision did not apply: [2009] EWHC 1530 (Comm), [2010] 1 Lloyd’s Rep 543.