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OUTER HOUSE, COURT OF SESSION
[2008] CSOH 63
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CA23/07
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OPINION OF LORD HODGE
in the cause
FARSTAD SUPPLY AS
Pursuers;
against
ENVIROCO LIMITED
Defenders:
And
ASCO UK LIMITED
Third Party
ญญญญญญญญญญญญญญญญญ________________
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Pursuers:
Clark QC; H
B J Gateley Wareing
Defenders:
Howlin; Paull & Williamsons
23 April 2008
Background
[1] The
pursuers were the owners of the oil rig supply vessel, MV Far Service, when it
was damaged by fire while berthed in Peterhead harbour on 7 July 2002. The pursuers
sue the defenders, which are a service company, for damages, averring that the
fire resulted from the negligence of the defenders' employees when they removed
residue from the starboard base oil tank.
It is averred that the fire started when the defenders' employees
disconnected their pipes; base oil flowed back from the pipes and ignited on
coming into contact with a hot engine after the vessel's main engines had been
started up.
[2] The
defenders, as well as averring contributory negligence against the pursuers'
employees, seek a contribution from the third party which was the charterer of
the vessel, averring that the third party failed in its duty as charterer and
base operator to direct and supervise the operations carried out on the vessel
while the vessel was in port. Although
it is not expressly averred, the pleadings imply that the third party failed in
its duty to the pursuers to take reasonable care to avoid causing physical
damage to the vessel. In the event that
they are found liable in damages to the pursuers, the defenders seek to recover
from the third party a contribution in terms of section 3(2) of the Law Reform
(Miscellaneous Provisions) (Scotland) Act 1940.
[3] The
pursuers in clause 33(5) of their charterparty with the third party dated 4 February 1994 granted the third party an
indemnity in the following terms:
"...the Owner shall defend,
indemnify and hold harmless the Charterer ... from and against any and all
claims, demands, liabilities, proceedings and causes of action resulting from
loss or damage in relation to the Vessel ... irrespective of the cause of loss or
damage, including where such loss or damage is caused by [sic], or contributed
to, by the negligence of the Charterer...".
That provision forms part of a clause which allocates
the risk of various events between the owner and the charterer.
[4] The
pursuers, accepting their obligation to indemnify the third party, appeared on
behalf of the third party at a Procedure Roll debate and sought to argue that
the defenders could not recover a contribution from the third party under
section 3(2) of the 1940 Act. They
submitted that by virtue of the indemnity the third party was not a person from
whom the pursuers could recover damages, if sued. The debate therefore focused on whether the
contractual obligations into which the pursuers entered before the occurrence
of the fire prevented the defenders from obtaining a contribution from the
third party under section 3(2) of the 1940 Act.
Discussion
[5] The
debate raises essentially two questions, one of statutory interpretation and
the other of the construction of the clause in the charterparty.
[6] Section
3 of the 1940 Act provides:
(1) Where in any action of damages in respect of loss or
damage arising from any wrongful acts or negligent acts or omissions two or
more persons are, in pursuance of the verdict of a jury or the judgment of a
court found jointly and severally liable in damages or expenses, they shall be
liable inter se to contribute to such
damages or expenses in such proportions as the jury or the court, as the case
may be, may deem just: Provided that nothing in this subsection shall affect
the right of the person to whom such damages or expenses have been awarded to
obtain a joint and several decree therefor against the persons so found liable.
(2) Where a person has paid any
damages or expenses in which he has been found liable in any such action as
aforesaid, he shall be entitled to recover from any other person who, if sued,
might also have been held liable in respect of the loss or damage on which the
action was founded, such contribution, if any, as the court may deem just.
(3) Nothing in this section
shall -
...
(b) affect any contractual
or other right of relief or indemnity
or render enforceable any agreement for indemnity which could not have
been enforced if this section had not been enacted.
[7] The issue between the parties
is whether the contractual indemnity prevented the defenders from seeking a
contribution from the third party. I
deal first with the issue of statutory interpretation.
Statutory interpretation
[8] Parties
referred to a number of Scottish authorities on section 3(2) of the 1940
Act. The case law may be summarised in
six points as follows. In the summary I
refer to the injured party as A, the person who has paid, or may have to pay (viz. Beedie
v Norrie 1966 SC 207), damages to
the injured party as B and the person from whom a contribution is sought as
C.
[9] The
first two points relate to the phrase in section 3(2) "in which he has been
found liable in any such action". This
phrase refers back to the words in section 3(1) "any action of damages in
respect of loss or damage...". First,
section 3 of the 1940 Act is available only in relation to actions of damages
which are raised in the Scottish courts.
Secondly, for B to be entitled to claim a contribution from C it is not
necessary that A should have obtained a contested judgment against B. If B settles A's claim, he may seek a
contribution from C, but the agreed quantification of damages is not binding in
a question between B and C. The court
has a discretion under section 3(2) to order the payment of such contribution
as may seem just. For these points see
the decision of the House of Lords in Comex
Houlder Diving Ltd v Colne Fishing Co
Ltd 1987 SLT 443.
[10] The
other four points relate to the position of C and in particular the phrase in
section 3(2), "any other person who, if sued, might also have been held
liable". Thus, thirdly, the expression,
"if sued", means if sued to judgment and so if A abandons an action against C,
B can still seek contribution from C relying on section 3(2): Singer v Gray Tool Co (Europe) Ltd 1984 SLT 149. Fourthly, if A, having sued B, thereafter
pursues a claim against C which by then is time-barred, A's belated action
against C does not prevent B from invoking section 3(2) against C: Taft v Clyde Marine Motoring Co Ltd 1990 SLT 170 and Dormer v Melville Dundas & Whitson Ltd 1990 SLT 186. This is because, as the First Division stated
in the latter case (at p.188L), "since 1949 the Scottish courts have
consistently taken the view that on a proper interpretation of section 3(2) it
was never within the power or whim of an injured party to determine by his own
actings whether or not one joint wrongdoer would be liable to relieve another
in respect of damages payable to the injured party".
[11] Fifthly,
and similarly, where B seeks a contribution from C, it is not necessary that A
has raised an action timeously against C to comply with a time limit such as
that which was formerly imposed in the Public Authorities Protection Act 1893 because
the words "if sued" assume that C has been "relevantly, competently and
timeously sued" by A and that all the essential preliminaries to a
determination of C's liability on the merits have been satisfied: Central S.M.T. Company Ltd v Lanark County Council 1949 SLT 310,
Lord Keith at p.314. This expression of
Lord Keith in 1949 was picked up by the judges in Singer, Taft and Dormer and has the authority of the Inner
House in the latter case. Mr Howlin, for
the defenders, founded on this formulation, submitting that section 3(2)
postulated merely a hypothetical action by A against C. The hypothetical action, he submitted, was to
be treated as relevant, competent and timeously raised.
[12] Sixthly,
and finally in this summary, it is clear from the decision of the First
Division in Dormer, which is binding
on me, that the assumption that C has
been sued "relevantly, competently and timeously" is not a hypothesis which is
wholly removed from the facts but is one the possibility of which falls to be
tested against the facts at a particular time.
The hypothesis has to be tested in the ordinary case at the date when A
sued B. If at that date A could have
sued C, then B can seek a contribution from C, whether or not A's claim against
C was time-barred thereafter. See Dormer at p.188C-F. This approach is consistent with the speech
of Lord Reid in George Wimpey & Co
Ltd v British Overseas Airways
Corporation [1955] AC 169, to which I was also referred and in which the
House of Lords was interpreting similar words in section 6 of the Law Reform
(Married Women and Tortfeasors) Act 1935.
In that case Lord Reid expressed the view that the words "if sued" had
to have a temporal connotation where a person might be held liable if sued at
one time but not if sued at another time (p.186). Mr Clark QC, for the pursuers, founded on
this approach, submitting that the hypothesis had to be tested against the
facts and that, in the present case, it was relevant to consider whether C had
a defence against an action raised by A.
[13] The
courts have not addressed directly the difficult issues which may arise where
A's action against C is time-barred before he commences his action against B. If the timeliness of a hypothetical claim
against C falls to be tested at the date at which A sues B, there may be
circumstances in which A's actions or inactivity after the date of the injury
might affect B's ability to seek contribution from C. It is possible to interpret section 3(2) more
broadly than the Inner House did in Dormer
when it was considering the ordinary case in which actions against several
wrongdoers were subject to the same time limits. Lord McCluskey in the Outer House in Dormer (1989 SLT 310, at p.313H-I) took
the view that the words, "any other person who, if sued", referred to any
person whom the pursuer could have sued at any time after the accident. Lord Dervaird concurred with that
interpretation in Taft (at
p.175F). The First Division in Dormer have not closed the door on this
view as they reserved their opinion on the correct time at which to test the
hypothesis that a person had been timeously sued where different time bars
affected claims against different defenders.
On that interpretation, if A failed to sue C and his claim against C was
time-barred before he sued B, an entitlement to contribution might exist under
section 3(2) although it was the time bar and not B's payment of damages which
freed C from his obligation to make reparation to A. It would nevertheless be broadly consistent
with the basis of the common law claim of relief referred to in paragraph 16
below where A had decided to seek his remedy from B alone and therefore had chosen
not to sue C. But that interpretation of
section 3(2) of the 1940 Act would not assist the pursuer in this case if the
indemnity bars the pursuers' claim as the indemnity pre-dated the accident.
[14] In this
case we are not concerned with an issue of prescription or time bar, but with
the question whether, on the hypothesis that the pursuers had sued the third
party timeously, the third party would have been held liable. The pursuers submit that the third party
would not, because of the indemnity. The
defenders contend that the third party would have been held liable (a) because
the hypothesis is that it would have been relevantly and competently sued, (b)
because the third party is liable in the sense that it is exposed to a finding
that it is a wrongdoer even if the indemnity prevents the pursuers from
obtaining damages from it and (c) because the injured party does not have the
power to determine whether one wrongdoer can claim contribution from
another.
[15] I am
not persuaded that the hypothesis of a relevant action allows the court to
ignore anything which might prevent the pursuers from succeeding on the merits
against the third party. The assumption
of a relevant claim by A against C is merely, in Lord Keith's words, an
essential preliminary and can be countered by the existence of a defence on the
merits which is available to C. The
statutory words "if sued" are followed by the words "might also have been held
liable". Those words are important. If C had and pleaded a good defence on the
merits, he would not be held liable to A and so B could not recover
contribution from him. I am also not
persuaded that, where the subsection states that C "might also have been held
liable", that reference to liability is a reference to a finding that a person
is a wrongdoer rather than a liability in damages or expenses. It is in my opinion clear from the opening
words of section 3(2) ("Where a person has paid any damages or expenses in
which he has been found liable in any such action as aforesaid") that the
subsequent words (referring to C), "who, if sued, might also have been held
liable in respect of the loss or damage", are a reference to liability in
damages or expenses in the action of damages.
It would be strange if the subsection allowed B to recover from C a
contribution towards B's liability to A on the basis of an action of relief if
C had a good defence on the merits which prevented A from obtaining a decree
for the payment of damages against him.
[16] I am
supported in this view by a consideration of the common law which predated the
1940 Act. A wrongdoer who has been held
jointly and severally liable with another wrongdoer in damages to an injured
party and who has paid the injured party can seek pro rata relief from the other wrongdoer. See Palmer
v Wick and Pulteneytown Steam
Shipping Co (1894) 21 R (HL) 39, to which Lord Keith of Kinkel made
reference in Comex Houlder at p.445
F-K. In Palmer (at p.45) Lord Watson explained the right of relief in the
following terms: "The claim of relief rests ... upon the fact, as Lord Bankton
puts it, that by the use of [the claimant's] money the rest have been freed
from their obligation - a circumstance which, in ordinary cases, is sufficient,
according to the law of Scotland, to raise a right of relief". See also Glasgow
Corporation v John Turnbull & Co 1932
SLT 457.
[17] Section
3(1) of the 1940 Act innovated on the common law by enabling the court to
apportion the liability of defenders, who had been found liable to the pursuer jointly
and severally, among themselves in such proportions as might seem just. Section 3(2) enabled a defender who had been
found liable in damages in an action to recover a just proportion of the
damages he had paid from any other person who, if sued, might also have been
held liable in damages for the same loss.
In my opinion the Act did not go further and allow B to recover a
contribution from C in circumstances where C had no obligation to pay damages
to A because he had a good defence on the merits. In such circumstances B's payment of the
damages could never free C from an obligation to A. Thus on Lord Watson's approach in Palmer the basis for a claim for relief
would be absent.
[18] Mr
Howlin founded on the statement of principle in the decision of the First
Division in Dormer (p.188L) that it
was not within the power or whim of an injured party to determine by his own
actings whether or not one joint wrongdoer should have a right of relief
against another. He submitted that the
indemnity was res inter alios acta in
a question between the defenders and the third party. In my opinion, however, the statement of
principle in Dormer addresses the
situation in the ordinary case where B has a claim for relief against C when A
raises an action against him and it prevents A by his actings thereafter from
defeating that claim. That is consistent
with the common law rule that a pursuer's discharge of one of two defenders who
have been sued jointly and severally to pay damages for negligence does not
prevent the other defender, on paying damages, from claiming pro rata relief (Douglas
v Hogarth (1901) 4 F 148). If the
principle is held to go further so that it prevents A through dilatoriness in
suing C at any time after the accident from defeating B's right to claim a
contribution from C (see paragraph 13 above), that would not assist the
defenders in this case.
[19] Where
by a contractual arrangement which pre-dated the occurrence of loss or damage
parties have regulated their affairs in good faith in a way which excludes the
liability of C to A in damages arising from wrongful acts or negligent acts or
omissions, the basis for a common law claim of relief is absent. That is because B's payment of damages would
not free C from liability to A. I do not
interpret the statutory provisions as innovating on the common law in this
regard or as overriding the effect of the contractual indemnity in a question
between A and B. Section 3(3), which
protects contractual rights of relief or indemnity, supports this view.
[20] I turn
therefore to the question of the construction of the indemnity.
Construction of the
charterparty
[21] Having
regard to the view which I have reached on the question of statutory
interpretation, the issue becomes whether the indemnity in the charterparty
prevents the third party from being liable in damages or expenses to the
pursuers. The relevant words are
"defend, indemnify and hold harmless".
[22] Mr
Howlin submitted (a) that the words "indemnify" and "hold harmless" bore the
same meaning and the latter added nothing to the former and (b) that in Scots
law there was no rule against circuity of actions such as existed in English
law which, as a result of the indemnity, would bar a claim by A against C .
[23] Mr
Clark QC invited me to give the words of clause 33.5 their ordinary and natural
meaning: Caledonia North Sea Ltd v British Telecommunications plc 2002 SC (HL) 117. He submitted that the proper
approach was to give effect to every word in the contractual provision if that
were possible: Crosse v Bankes (1886) 13 R (HL) 40, Lord
Halsbury LC at p.41. The clause was part
of a contract in which the parties allocated risks and thereby took on
responsibility to insure against the allocated risks. While, in the context of joint wrongdoing,
the consequence might be that one party would require to bear the entire
financial consequences of an accident even though another was also at fault and
that was arguably inequitable, that was the result of the clear terms of the
contract. He submitted that "hold
harmless" clauses were a well-known feature of charter agreements and the
defenders could have made appropriate provision for their protection in their
contract with the third party.
[24] The
words "hold harmless" may in some circumstances be equated with "indemnify" but
I am not persuaded that they add nothing to an obligation to indemnify. Mr Clark referred to Majkowski v American Imaging
Management Services LLC 2006 WL 3627111 (Del Ch), in which the plaintiff
sought to argue that a contractual obligation by a company to hold harmless an
executive employee entitled the employee to payment of his litigation expenses
as they were incurred regardless of whether he was ultimately entitled to
indemnification in respect of the underlying claim. Vice Chancellor Strine in his opinion stated
that Delaware law recognized that indemnification and advancement were two
distinct and different legal rights and so held that the obligation to
"indemnify and hold harmless" did not encompass advancement rights. That is an issue with which we are not concerned
in this case. But in his discussion he
stated (in paragraph 12) that the terms "indemnify" and "hold harmless" had a
long history of joint use in Anglo-American legal practice and appeared in
countless types of contracts. He stated
that modern authorities confirmed that "hold harmless" had little if any
different meaning from the word "indemnify".
However in footnote 55 of his opinion he stated that the terms "while
having similar, if not identical meanings, are typically used in subtly
different contexts. In the abstract, the
word indemnify generally grants rights, and the phrase hold harmless generally
limits liability".
[25] Counsel
agreed that there was no guidance on the meaning of "hold harmless" in English
law dictionaries. In (the American)
Black's Law Dictionary (8th ed. 2004), to which Vice Chancellor
Strine referred, there is the following definition:
"hold harmless, vb. To
absolve (another party) from any responsibility for damage or other liability
arising from the transaction; INDEMNIFY - also termed save harmless"
This definition, while suggesting a relationship with
"indemnify", supports the view that the words "hold harmless" involve a
limitation or exclusion of liability while "indemnify" involves reimbursing
another for a loss suffered. Also the
Oxford English Dictionary includes in its definition of "harmless" the meaning,
"free from liability to pay for loss or damage" especially in the phrase "to
save harmless".
[26] The
pursuers by agreeing to "defend, indemnify and hold harmless" the third party
from all liabilities resulting from damage in relation to the vessel not only agreed
to indemnify the third party against any loss which it might incur from such
liability to another but also renounced any right to claim damages from the
third party in the circumstances which have arisen in this case. On that basis, the third party was not
someone who, if sued, would be held liable in damages to the pursuer in terms
of section 3(2) of the 1940 Act.
[27] As I
have reached the view that the obligation to "hold harmless" goes beyond an
obligation to reimburse, Mr Howlin's point about circuity of proceedings does
not arise. In any event, if the
obligation on the pursuers in clause 33.5 were simply an obligation to
reimburse the third party, that obligation, if pleaded against them, would
prevent the pursuers from obtaining a decree against the third party for
payment of damages in the circumstances of this case. On either approach therefore the contractual
provision would prevent the pursuers from obtaining damages from the third
party and, as a result, exclude the defenders' right to obtain contribution
from the third party.
Other matters
[28] Mr
Clark referred to the Civil Liability (Contribution) Act 1978 which applies in
the rest of the United Kingdom and to the decision of the House of Lords on
that Act in Co-operative Retail Services
Ltd v Taylor Young Partnership Ltd [2002] 1WLR 1419. As the statutory provisions
are materially different from those of the 1940 Act I derive little assistance
from the case in interpreting the latter Act.
However I note that the House of Lords in that case accepted that a
contractual arrangement between the injured party on the one hand and the party
which was in breach of contract (or a tortfeasor) on the other could prevent a
third party from seeking contribution under the 1978 Act from the latter. That is a result with which my interpretation
of section 3(2) of the 1940 Act is consistent.
[29] Mr
Clark referred to various cases in which parties had entered into contracts
which allocated risks between them and thus excluded or limited liabilities
which would otherwise arise. He referred
to Caledonia North Sea Ltd (above), Scottish Special Housing Association v Wimpey Construction (UK) Ltd 1986 SC
(HL) 57 and Balfour Beatty Ltd v Gilcomston North Ltd 2006 SCLR 717. It appears to me that parties who
require to work together may obtain significant benefits by allocating risks
between themselves and thereby determining who has the responsibility to insure
against the allocated risks. Parties may
avoid the need to prove fault or breach of contract in the event of a mishap
and there may be savings in the costs of insurance by avoiding duplication of
cover. In this case, as Mr Howlin
submitted, an obligation on the third party to contribute to the defenders
would not subvert the contractual arrangements as the third party could claim
reimbursement from the pursuers under the indemnity. But there are many contractual provisions
which allocate responsibility which do not rely on indemnities and in which the
allocation of risk would be subverted if a party freed from a risk in a
question with A were required to contribute to B as a joint wrongdoer. The contractual provisions in Co-operative Retail Services Ltd (above)
are one such case.
[30] Section
3(2) of the 1940 Act respects such contractual allocations of responsibility by
providing that the statutory right to contribution is available only if A could at some time
after the accident have held C liable for the loss in respect of which B has
paid damages. B's statutory right to
contribution therefore does not trump the contractual allocation of risk
between A and C.
[31] While
this may on occasion give rise to what appears to be an inequitable result as a
party who has only a minor responsibility for causing an accident may have to
bear the entire financial loss, that eventuality is something which a
contractor needs to take steps to guard against.
Conclusion
[32] I am
satisfied that the pursuers at the time of the accident and thereafter did not
have a right to obtain damages from the third party in relation to the damage
which the vessel suffered in the fire and that as a result the defenders are
not entitled to a contribution from the third party under section 3(2) of the
1940 Act. I therefore uphold the first
plea-in-law for the pursuers by (a)
excluding from probation the averments in Answer 4 on page 4 of the defences in
the two sentences from "Separatim, it was the duty" to "materially contributed
to the accident" and the last two sentences in Answer 5 on page 8 commencing
"Further explained" and (b) repelling the fifth plea-in-law for the defenders.
