Share it

The two-day hearing in this case will begin on Tuesday, 9 March 2010 to consider an appeal from a decision of the Inner House of the Scottish Court of Session in relation to a claim arising out of a charterparty agreement between the parties, and the interpretation of s.3(2) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1940 (the “Act”) as it relates to contributory negligence.  The appeal will seek to clarify whether the provision as set out in the charterparty agreement relates to an indemnity clause or an exclusion clause.

Farstad, the owners of an oil rig supply vessel had chartered a vessel, the ‘MV Far Service’, to Asco.  Enviroco was a contractor appointed to clean the oil tanks in the vessel.  While the oil tanks were being cleaned in Peterhead harbour, a fire broke out resulting in a fatality and causing considerable damage.  The fire was caused when an Enviroco employee inadvertently caused oil to flow into the engine room near hot machinery. 

Farstad sought damages from Enviroco in respect of the damage caused on the basis that Enviroco’s employee had acted negligently while carrying out their cleaning duties. Enviroco sought to add the charterer of the vessel, Asco to the action as a third party on the basis that they were partly responsible for the damage in failing to supervise the operations. Enviroco sought to rely on s.3(2) of the Act which provides, “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.” 

However, in clause 33(5) of the charterparty agreement, it was provided that

“… 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 negligence of the Charterer…”.

The issue for the court was how the operation of clause 33(5) affected the interpretation of s.3(2) of the Act.

At first instance, Lord Hodge held that because of the provision in clause 33(5) of the charterparty agreement, Asco could not be found liable and therefore Enviroco were not entitled to a contribution under the Act.  
 
On appeal however, the Inner House of the Court of Session found (by a 2-1 majority) in favour of Enviroco, establishing that clause 33(5) was an indemnity clause and not an exclusion clause. The charterparty agreement operated to allocate the costs of liability in the event Asco were found liable; it did not specifically exclude liability. The effect of the decision is that the indemnity provision will come into effect only if Asco were sued by Farstad and were held liable, and then it will be for Asco as the indemnified party to call upon Farstad to indemnify them and so recover the costs.  This was seen by the Court as “broadly equitable” as Enviroco would only be required to pay damages attributable to their actual contribution to the loss, and Farstad would receive reduced damages as a result of having entered into a freely negotiated contractual indemnity with Asco.  However, Lord Osborne gave an opinion dissenting with the majority (Lady Paton and Lord Carloway), holding that Farstad would clearly be prevented from suing Asco by the ordinary meaning of clause 33(5): the parties had freely negotiated a contractual apportionment of liability and it would be inequitable for the Court to interfere with those arrangements.
 
Decisions of the Court of Sessions in Scotland are appealable as of right to the Supreme Court, so Farstad did not have to gain permission. It will be interesting to see how the Justices resolve the conflicting views of the Court below, not least because, as practitioners have pointed out, the decision appears to be in conflict with a previous decision of the House of Lords which raised broadly similar issues to the present case (Co-operative Retail Services Limited v Taylor Young Partnership Limited and others [2002] UKHL 17). The appeal is due to be heard by Lord Phillips, Lord Hope, Lord Rodger, Lord Mance and Lord Clarke.