Farstad Supply AS v Enviroco Limited and another (Scotland)

A person liable for damage may recover contribution under section 3(2) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1940 only from another person who could have been held liable to the injured party. The hypothetical action assumes that the other person was sued relevantly, competently and timeously, but it also gives effect to any contractual defence arising from a pre-existing allocation of risk.

A contractual term requiring one party to defend, indemnify and hold the other harmless may, construed in context, exclude direct liability as well as provide an indemnity against third-party claims. Even a narrow indemnity may prevent judgment through the principle against circuity of action. In either event, the protected party is not liable for contribution.

A vessel owner sued a contractor in negligence for fire damage sustained while the contractor was cleaning the vessel. The contractor claimed a contribution from the charterer under section 3(2) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1940.

The Lord Ordinary rejected the contribution claim. An Extra Division allowed the contractor’s reclaiming motion by a majority: [2009] CSIH 35; 2009 SC 489. The owner appealed.

The issues were whether a pre-existing contractual defence could be considered when deciding if the charterer, “if sued”, might have been held liable, and whether clause 33.5 of the charterparty protected the charterer from liability for damage caused by its negligence.

1. The appeal was allowed unanimously. The Inner House’s interlocutor was recalled, the Lord Ordinary’s interlocutor was restored and the cause was remitted to the Lord Ordinary to proceed as accords (Lord Clarke, with whom Lord Phillips agreed; Lord Hope, Lord Rodger and Lord Mance concurring).

2. Sections 3(1) and 3(2) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1940 must be read together. Section 3(2) applies where the contributor has been held liable and seeks relief from another person who, had the injured party sued that person, might also have been held liable for the same damage. The hypothesis assumes a relevant, competent and timely action, but it does not disregard substantive defences (paras 8–17, 37–44 and 50–55).

3. The statutory prerequisite is absent where a pre-existing contract between the injured party and the proposed contributor excludes the latter’s liability. Ordinary contractual allocations of risk remain effective. The result is not attributable to the injured party’s whim: it follows from the legal relationship deliberately established before the loss (paras 16–17, 43–44 and 52–55). The observations in Singer, Central SMT and Dormer concerning limitation, abandonment and a pursuer’s whim did not govern a person who could never have been sued successfully because of such a contractual defence.

4. Clause 33.5, read within clause 33 and the charterparty as a whole, excluded the charterer’s liability to the owner for damage to the vessel caused by the charterer’s negligence. The words “defend, indemnify and hold harmless”, the reference to claims, demands, liabilities and proceedings, the heading “Exceptions/Indemnities”, the reciprocal allocation of risks and clause 33.11 showed that the clause combined an exclusion of direct exposure with protection against third-party claims (paras 21–29 and 56–59).

5. Alternatively, if clause 33.5 operated only as a narrow indemnity, the owner’s action would fail through circuity of action or the equivalent principle frustra petis quod mox es restiturus. A court would not order payment which the claimant must immediately repay. The charterer therefore would not have been held liable within section 3(2) on that construction either (paras 30–34, 44 and 59).

1. United Kingdom Supreme Court: Allowed the appeal unanimously, recalled the Inner House’s interlocutor, restored the Lord Ordinary’s interlocutor and remitted the cause.
2. Inner House of the Court of Session: By a majority, allowed the reclaiming motion and reversed the Lord Ordinary: [2009] CSIH 35; 2009 SC 489.
3. Outer House of the Court of Session: The Lord Ordinary held that the contractor was not entitled to contribution from the charterer: [2008] CSOH 63; 2008 SLT 703.