Seadrill v Gazprom: Importance of Clear Drafting

August 9, 2010

This article was prepared for and first featured in Infrastructure Journal

The recent Court of Appeal ruling in Seadrill v Gazprom acts as a reminder of the importance of, and provides a rare insight into, the judicial treatment towards clauses governing liability in oil and gas related contracts, and the perils associated with "cookie cutting" contractual provisions from one jurisdiction to another. Useful guidance is also given on the meaning of certain key provisions within the International Association of Drilling Contractors (IADC) offshore form.

The Facts

Russia's Gazprom entered into a rig hire contract with the Hamilton, Bermuda headquartered Seadrill, based on an IADC offshore form, to drill wells in India for an exploratory gas well off the coast of Bengal. During part of the operations relating to the first well, the rig became damaged and was consequently removed from the well site and taken to Singapore for repairs. The parties then fell out and the rig never returned to the well site.

The dispute centred around the cause of the incident and who would be liable for the consequences and losses incurred. Seadrill argued in an English Law Court that the contract excluded all liability for its own negligent operation.

In the first instance, Mr Justice Flaux found that Seadrill's negligence during the preloading operations was the only cause of the incident. The contract did not exclude liability for such negligence and contained an implied term that Seadrill would operate the rig with reasonable skill and care. As a result of this, Seadrill was liable to Gazprom for damages for wasted costs suffered as a result of the failed and aborted drilling operation.

In the first instance, Mr Justice Flaux found that Seadrill's negligence during the preloading operations was the only cause of the incident. The contract did not exclude liability for such negligence and contained an implied term that Seadrill would operate the rig with reasonable skill and care. As a result of this, Seadrill was liable to Gazprom for damages for wasted costs suffered as a result of the failed and aborted drilling operation.

Seadrill subsequently appealed against Mr Justice Flaux's judgment where it admitted negligence at the England & Wales Court of Appeal. The main question facing the court was what sums could be recovered by Gazprom. Seadrill claimed for unpaid hire costs while Gazprom argued that any liability for this sum should be set off against the costs incurred by Gazprom.

The drilling company argued it had no liability for any such direct losses under the contract whereas Seadrill argued that Gazprom should pay for the damage caused to the rig on the basis of a clause dealing with unforeseen seabed conditions. The appeal focused on the interpretation of a number of clauses of the IADC form, and whether an obligation to operate the rig with reasonable care and skill could be implied into the contract and in particular whether such an implied term was inconsistent with the other terms of the IADC offshore form.

The Contract

The parties used a US-based IADC standard form contract for offshore international drilling, but which was governed by English law. A difference in jurisdiction therefore existed and it is the judicial attention paid to this difference which renders the case particularly noteworthy. Despite the incorporation of the IADC form into the contract (and thus the incorporation of US legal principles), the contract itself was governed by English law principles.

Normal English law principles of contract interpretation should therefore apply and interpretations from a US legal perspective should not deviate away from those principles. In the absence of express contractual provisions setting the standard of performance that Seadrill would have to abide by, English law principles imply into service contracts a higher level of reasonable skill and care. Any negligent deviation away from such a principle therefore amounts to a breach of this implied term.

In determining whether Seadrill was liable for its negligent operation of the rig, the Court of Appeal paid due consideration to the meaning of particular paragraphs (viz. 501, 606 and 911) of the contract, stemming from the standard IADC offshore form.

Paragraphs 501 and 911 did not create a code of risk allocation and at the Court of Appeal Seadrill contended that they had the effect of precluding any liability for negligence during the preloading operations, particularly given the absence of any other contractual provisions conferring liability. Seadrill also contended that Gazprom was liable for any incident in the absence of any contractual provision to the contrary. The Court of Appeal rejected Seadrill's argument stating that paragraph 501 was not inconsistent with a contractor's implied obligation to operate the rig with reasonable skill and care. Paragraphs 501 and 911 did not expressly exclude such an obligation on Seadrill. The court held that Seadrill was liable for its negligent operation of the rig.

Paragraph 606 concerned the drilling site and access to drilling locations. It provided an indemnity to a contractor where defects in the soil contributed to, or were a cause of, damages to the rig. Gazprom was responsible for providing access to the drilling site, for ensuring the site was in a suitable condition for the contractor to drill from and for indemnifying the contractor for any damage to the rig caused by faulty bottom conditions at the site.

Initially Seadrill contended that because the rig had inclined and suffered damage, this meant the seabed conditions were unsuitable to support the rig within the meaning of paragraph 606 and so the soil had proved unsatisfactory in supporting the drilling unit. It therefore fell within the remit of paragraph 606.

The Court of Appeal rejected Seadrill's argument. The soil was satisfactory and was capable of properly supporting the rig. Seadrill was still liable for the consequences of its negligent conduct.

The IADC Form

The Court of Appeal considered whether it was correct and proper to have regard to historical amendments made to IADC forms over the years. The 1974 IADC form expressly required contractors to operate to a standard of reasonable skill and care, whereas the 1989 form did not. The parties had used the 1989 form as a basis for the contract and Seadrill sought to rely on this important difference between the two forms in the Court of Appeal, arguing that by virtue of having contracted on the basis of the 1989 form, the parties contracted for an express intention of no liability should they deviate from that standard.

The court held the parties had merely used the most recent version of the IADC offshore form without any express thought paid to the content of and differences between the previous version, or reasons for such differences. Any reasonable person would logically choose the most up to date version. In line with most judicial treatments to the construction of contracts, it was held the contract should be considered on its own terms taking into account the commercial background within which it was contemplated and entered into. The message from this case is clear, earlier editions of the IADC offshore form should not be used to influence the use of later editions.

Conclusion

In Seadrill v Gazprom, the Court of Appeal did not accept that the contract should be interpreted in such a way that would allow Seadrill to escape liability for any breach of contract. It had acted negligently, in some circumstances incompetently, and failed to discharge its duties to a level of reasonable skill and care. As soon as Seadrill entered into the contract, it became subject to the normal liability of failing to adhere to reasonable skill and care in the provision of its services. To exclude such a liability, one would have to negotiate and incorporate into a contract specific, clear and unambiguous wording as required. No such wording existed in the contract to operate the rig.

This case also acts as authority for the interpretation of IADC forms and acts as a crucial reminder of the importance of clear drafting, forward thinking and risk management when dealing with potential liability issues. "Cookie cutting" contracts drafted in one jurisdiction and transporting it into another is laden with risk.



Related pages:

Litigation, Arbitration and Alternative Dispute Resolution more

Natural Resources more

icons Addthis Print Contact Register

Contact

tel: +44 (0) 20 7628 2000
10 Finsbury Square, London, EC2A 1AF
View map

Accreditations

  • Top Ranked Chambers UK 2014 - Leading Firm
  • Ranked in Chambers Europe 2013 - Leading Individual
  • Ranked in Chambers Global 2014 - Leading Firm
  • Legal 500 - Leading Firm
  • The Lawyer UK 200 - Listed Firm
  • The Law Society Excellence Awards 2012 - Shortlisted
  • Investors in People - Bronze