House of Lords
|Session 2001- 02
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|Judgments - Caledonia North Sea Limited (Respondents) v British Telecommunications Plc (Appellants) (Scotland) and Others
HOUSE OF LORDS
Lord Bingham of Cornhill Lord Mackay of Clashfern Lord Nicholls of Birkenhead Lord Hoffmann Lord Scott of Foscote
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
CALEDONIA NORTH SEA LIMITED (RESPONDENTS) v BRITISH TELECOMMUNICATIONS PLC (APPELLANTS) ( SCOTLAND)CALEDONIA NORTH SEA LIMITED (RESPONDENTS) v KELVIN INTERNATIONAL SERVICES LIMITED (FORMERLY KELVIN CATERING LIMITED) (APPELLANTS) (SCOTLAND) CALEDONIA NORTH SEA LIMITED (RESPONDENTS) v LONDON BRITISH ENGINEERING LIMITED (APPELLANTS) (SCOTLAND) CALEDONIA NORTH SEA LIMITED (RESPONDENTS) v NORTON (NO 2) LIMITED (IN LIQUIDATION) (APPELLANTS) (SCOTLAND) CALEDONIA NORTH SEA LIMITED (RESPONDENTS) v PICKUP NO 7 LIMITED (FORMERLY NORTHERN INDUSTRIAL & MARINE SERVICES COMPANY LIMITED) (APPELLANTS) (SCOTLAND)
CALEDONIA NORTH SEA LIMITED (RESPONDENTS) v STENA OFFSHORE LIMITED (APPELLANTS) (SCOTLAND)
CALEDONIA NORTH SEA LIMITED (RESPONDENTS) v WOOD GROUP ENGINEERING CONTRACTORS LIMITED (APELLENTS) (SCOTLAND)
ON 7 FEBRUARY 2002
 UKHL 4
LORD BINGHAM OF CORNHILL
1. The explosive conflagration which destroyed the Piper Alpha oil platform on 6 July 1988 cost the lives of many men and injured many others. The claims made by and on behalf of the victims were fully settled years ago. These proceedings are the contractual aftermath of those settlements, brought to decide who, as between the operator of the platform and the contractor who employed each individual victim, must bear the financial cost of the settlements. As my noble and learned friend Lord Mackay of Clashfern has explained in his summary of the facts, history and issues relevant to these appeals, which I gratefully adopt and need not attempt to repeat or elaborate, only one of seven test cases originally selected for decision is now live before the House.
2. Operations to exploit the oil and natural gas resources of the North Sea have two prominent features relevant for present purposes. First, such operations are potentially hazardous. It is generally true, as the Lord Ordinary in his judgment said of Piper Alpha, that
The second feature worthy of note is the involvement of many contractors and sub-contractors. This is exemplified by the present case. As Lord Mackay has noted, the Piper Alpha disaster led to claims against 24 different contractors. Of those on board the platform who were killed, 134 were employed by contractors and 31 by the operator. Of those who survived, 55 were employed by contractors and 6 by the operator.
3. These features are not unique to North Sea oil exploitation. They are also to be found, to a greater or lesser extent, in the nuclear power industry. But the regulatory regime governing the two industries has been very different.
4. The Nuclear Installations (Licensing and Insurance) Act 1959 made provision for the licensing of nuclear installations, required licensees (but not the Atomic Energy Authority or government departments) to provide cover to meet claims by insurance or otherwise (sections 5 and 9), imposed a strict liability on licensees to secure that no ionising radiations were emitted (section 4(1)) and stipulated that "no person other than the licensee shall be under any liability in respect of any hurt to any person or any damage to any property caused by any ionising radiations to which subsection (1) of this section applies" (section 4(2)). The purpose of this provision and of the governmental exception was explicitly stated by the minister when introducing the bill in the House of Lords (HL Deb, 13 November 1958, cols 504-505, 509):
This broad approach was reflected in international conventions made in Paris (1960), Brussels (1963) and Vienna (1963). There followed the Nuclear Installations (Amendment) Act 1965 and the law was consolidated in the Nuclear Installations Act 1965. This revoked the distinction between governmental operators and other licensees (sections 7 to 9), but continued to lay a strict duty on the licensee (section 7) and continued to provide that no liability should fall on any party other than, in effect, the licensee (section 12(1)(b)). The licensee was still obliged to provide cover against claims by insurance or otherwise up to a specified limit (section 19), but there was still to be no right of subrogation. Thus standard forms of nuclear insurance contain a waiver of any subrogation rights by the insurers (Tromans and Fitzgerald, The Law of Nuclear Installations and Radioactive Substances, (1997), pp 146, 149, paras 3-56, 3-60).
5. Oil exploration in deep offshore waters developed in the early 1960s, at first in the Gulf of Mexico. Operations in the North Sea followed soon after. In December 1965 the offshore self-elevating barge SEA GEM collapsed, capsized and sank some 40 miles east of the mouth of the River Humber. An inquiry was held and in the report which followed (1967) (Cmnd 3409), it was recommended that there be a statutory code supported by credible sanctions to regulate the management of drilling rigs and similar structures offshore (p 24, para 10.2(i)). Effect was given to this recommendation in the Mineral Workings (Offshore Installations) Act 1971. This provided for the appointment of a manager of every offshore installation (section 4(1)), who was to have general responsibility for matters affecting safety, health and welfare (section 5(2)), and the secretary of state was empowered to make regulations for the safety, health and welfare of persons on offshore installations (section 6(1)). The breach of a statutory duty imposed by the Act, if causing death or personal injury, was to give rise to civil liability (section 11). In exercise of his power under section 6 and other provisions, the secretary of state made the Offshore Installations (Operational Safety, Health and Welfare) Regulations 1976 (SI 1019/1976), which imposed duties on the operator of any installation and on the employer of any employee and on "every person while on or near an offshore installation" to comply or ensure compliance with the safety regulations.
6. When contrasted with the statutory regime applicable to nuclear installations, that applicable to offshore installations displays one important common feature: the operator is answerable for almost any safety failure causing death or personal injury, as the licensee is generally liable for death or personal injury caused by radioactivity. But there are two differences: the operator of an offshore installation is not, like the licensee of a nuclear installation, obliged (save in his capacity of employer) to provide cover against claims by insurance or otherwise; and there is no statutory inhibition of any right of indemnity or subrogation which might arise between the operator or the operator's insurer and any other party.
7. As would be expected, a market practice has developed to take account of the peculiar features of offshore operations. The standard practice during construction is thus described by Sharp, Offshore Oil and Gas Insurance (1994), p 108:
A similar practice is customary when the installation has become operational see Sharp, p 277:
These passages were published before judgment had been given by the Lord Ordinary in these proceedings.
8. A similar account is given by Daintith and Willoughby, Manual of United Kingdom Oil and Gas Law 2nd ed, (1984), pp 171-172, para 1-845 in a passage describing the operator as "the client":
Liability for third party claims may also be assumed by either the client or the contractor, though in this case there is commonly an exception to the extent of the negligence of the other; and sometimes the exception is expressed to apply only in the case of the sole negligence of the other (Daintith and Willoughby, p. 172, para 1-846 and footnote 1).
9. Thus, if a contractor's employee is killed or injured on an offshore installation it would be natural to expect a claim by or on behalf of the victim against the operator, as the party with overall responsibility for safety, followed by a claim by the operator (or the operator's insurer) against the contractor under the indemnity given by him to the operator. That such a course of events is not unusual elsewhere is shown by Fontenot v Mesa Petroleum Co (1986) 791 F 2d 1207, 1209 where Judge Brown, sitting in the US Court of Appeals for the Fifth Circuit, said:
At p 1216 he further said:
The first issue: construction
10. In common with the Lord Ordinary, all four judges of the Inner House and all members of this House, I am of the clear opinion that clause 15(1)(c) of the Norton (No 2) contract (cited by my noble and learned friend Lord Mackay) must be construed in the sense contended for by the operators. That is the plain meaning of the words used. It reflects the practice which has developed among those undertaking offshore oil operations. It is understandable that the right to indemnity should be excluded where the negligence or breach of statutory duty of the party seeking indemnity was the sole cause of the death or injury, but that is the limit of the derogation from the rule that each party, operator or contractor, assumes the ultimate responsibility for compensating its own employees regardless of fault. It is a little unclear why the opening paragraph of clause 15(1) was included in the contract at all, but that may explain why a number of contracts omitted it. While one might have expected the operator to require the contractor to insure against any potential liability under the contract, it seems plain that clause 16 (cited by my noble and learned friend) was drafted to give effect to the operator's obligation under the Employers' Liability (Compulsory Insurance) Act 1969 and regulation 6 of The Offshore Installations (Application of the Employers' Liability (Compulsory Insurance) Act 1969) Regulations 1975 (SI 1289/1975).
The second issue: subrogation
11. I am in full agreement with the conclusions expressed by Lord Mackay on the second (subrogation) issue. The law has long been settled in England and Wales, as (I understand) in Scotland, that an insurer who has fully indemnified an insured against a loss covered by a contract of insurance between them may ordinarily enforce, in the insured's own name, any right of recourse available to the insured: see Randal v Cockran (1748) 1 Ves Sen 98; Mason v Sainsbury (1782) 3 Dougl 61, which Lord Mackay has cited; London Assurance Company v Sainsbury (1783) 3 Dougl 246; Yates v Whyte (1838) 4 Bing NC 272; Dickenson v Jardine (1868) LR 3 CP 639. On an appeal to the House of Lords from the Court of Session in Simpson & Co v Thomson (1877) 3 App Cas 279, 286 Lord Cairns LC reviewed several of these authorities and concluded:
In Castellain v Preston (1883) 11 QBD 380, 388 Brett LJ, in his classical exposition of the law, was at pains to emphasise the amplitude of the insurer's right, giving him
More recently, Lord Templeman restated the principle in Lord Napier and Ettrick v Hunter  AC 713, 732. When the law of marine insurance was codified in the Marine Insurance Act 1906, the relevant rules were expressed in sections 79 and 80, which provide:
Although applicable in terms only to marine insurance, these sections express more general principles. And the argument for the contractor seeks to build upon them. In very simplified form the argument runs like this. A claim was made against the operator for the death of Mr Pyman, an employee of the contractor. It was settled by the operator's insurers. The operator itself therefore suffered no ultimate loss and has no claim to be pursued in its name against the contractor. The operator's insurers may have a claim to contribution against the contractor as another party liable (with the insurer) to indemnify the operator but that is not a subrogated claim to be pursued by the insurer in the name of the operator but a claim to contribution from a co-indemnifier to be pursued by the insurer in its own name.
12. The right of an insurer who has paid a claim to seek contribution from other insurers of the same risk on the same interest in the same property is clearly established: see MacGillivray on Insurance Law, 9th ed, (1997), p 573, para 23-1; Arnould, Law of Marine Insurance and Average, 16th ed (1981), vol 1, p 283, para 407. It is equally clearly established that a surety who is obliged to pay the debt owed by the debtor to the creditor is entitled to contribution from his fellow co-sureties: Rowlatt on Principal and Surety, 5th ed (1999), p 164, para 7-45; Andrews & Millett, Law of Guarantees, 3rd ed (2000), pp 391-392, para 12.01: English Private Law, edited by Birks, (2000), vol 1, Chap 5 ("Security", Lionel Smith), p 463, para 5.176. The question at the heart of this issue in the appeal is, as it seems to me, this: is the present claim, as the operator contends, a subrogated claim properly made in its name by its insurer (who has indemnified it under a policy of insurance) to enforce a contractual right of the operator against the contractor? or is it, as the contractor contends, a claim for contribution by one party liable to indemnify the operator against another?
13. I am clearly of opinion that the operator's contention is to be preferred, for the reasons given by the judges of the Inner House and also by Lord Mackay. The operator was not obliged to insure itself against adverse claims. Thus the existence of such insurance, prudent though no doubt it was in business terms, is irrelevant to the mutual obligations of the operator and the contractor; in technical language, it was strictly res inter alios acta. It would be wholly anomalous if the operator's voluntary decision to insure itself against the risk to which it was exposed should operate to the advantage of the party against whom its contractual claim for indemnity lay (a party not involved in the decision to insure and not responsible for payment of any part of the premium). The contractor's contention would also, as it seems to me, disturb the very clear apportionment of risk for which the parties have provided by their contract. As already noted, the legislature has not sought in this field to restrain the pursuit by insurers of subrogated claims.
14. When, in Mason v Sainsbury (1782) 3 Dougl 61, 64, Lord Mansfield CJ asked "Who is first liable?" his question was directed not to any issue of chronology but to establishing where the primary responsibility lay to make good the loss. The terms of the Riot Act 1714 made plain that the primary responsibility lay with the inhabitants of the hundred, and it mattered not that the insurer had indemnified the insured. So in the present case: the contract between the parties and the commercial scheme of which it was part make it plain that primary liability was to fall on the contractor, just as in North British and Mercantile Insurance Company v London Liverpool and Globe Insurance Company (1877) 5 Ch D 569, on very different facts, it was held that the loss should be borne by the wharfinger's insurer because "the primary liability" (per Baggallay JA at p 587) was that of the wharfinger.
15. The researches of counsel have not disclosed any Scots or English case in which any contention at all similar to the contractor's in this case appears to have been advanced. But courts in the United States have been asked to consider a similar contention. The American cases must be approached with a measure of reserve since courts have on occasion applied a principle of superior equity which has no counterpart in our law. It is nonetheless clear that courts of high standing have adopted an approach close to that outlined in the foregoing paragraphs. In Hall & Long v The Railroad Companies (1871) 80 US 367 Strong J, giving the opinion of the Supreme Court of the United States, said at p 370:
In Chicago St Louis & New Orleans Railroad Co v Pullman Southern Car Co (1891) 139 US 79 at 88 the liability of the railroad company was described as "in legal effect, first and principal" and that of the insurer as "secondary, not in order of time, but in order of ultimate liability". In FH Vahlsing Inc v Hartford Fire Insurance Co (1937) 108 SW 2d 947, 950 the Court of Civil Appeals of Texas adopted a statement in 26 Corpus Juris to this effect:
In Meyer Koulish Co v Cannon (1963) 28 Cal Rptr 757, 762 a District Court of Appeal in California observed:
The Supreme Court of Washington expressed the point very clearly in Consolidated Freightways Inc v Moore (1951) 229 P 2d 882, 885.
A similar ruling was made in North Central Airlines Inc v City of Aberdeen, South Dakota (1966) 370 F 2d 129, a decision of the United States Court of Appeals.
16. Reference was made to Albion Insurance Co Ltd v Government Insurance Office of New South Wales  121 CLR 342. That was a decision of the High Court of Australia, concerned with the right of a co-insurer to contribution. Kitto J (at pp 349-350) referred to the principle that "persons who are under co-ordinate liabilities to make good the one loss (eg sureties liable to make good a failure to pay the one debt) must share the burden pro rata". But his ruling was not directed to the case where the liabilities of the two indemnifiers are not co-ordinate, where (to use different language) one liability is primary. In Speno Rail Maintenance Australia Pty Ltd v Hammersley Iron Pty Ltd (2000) 23 WAR 291 the Supreme Court of Western Australia followed the decision of the Inner House in the present case. Ipp J pointed out (at p 312, para 93) that the competing liabilities (one of them arising from a contract of insurance) were intrinsically different and not co-ordinate. Wheeler J, at p 327, paras 167 and 168, shared this view:
I can find no support for the contractor's contention in the terms of the contract, in the commercial context, in principle or in authority. I would accordingly resolve this issue against the contractor, as the Inner House did.
The third issue: consequential loss