Member Article

Indemnity clauses and negligence - a review of the impact of the judgment in the Buncefield disaster case on the effect of indemnity clauses and whether a party can recover under an indemnity clause where it caused the damage by its own negligence.

Colour Quest Limited v Total Downstream UK PLC and Others [2009] EWHC 540 (Comm)

Background and Facts

This case arose out of the huge explosions at the Buncefield Oil Storage Depot at Hemel Hempstead, Hertfordshire, on 11 December 2005.

The claims arising from the incident are reported to be in excess of £750m. Mercifully, there were no fatalities.

The judgment runs to some considerable length and reflects the complexity of the facts but, in essence, the following points are relevant to the contract lawyer:

• Hertfordshire Oil Storage Limited (HOSL) occupied part of the Buncefield site.
• HOSL was a joint venture company owned as to 60% by Total and 40% by Chevron.
• HOSL was one of the defendants to the proceedings.
• Chevron (supported by HOSL) sought to blame Total for the incident.
• Total sought to blame HOSL, and argued that where Total had been involved in the project it had acted on HOSL's behalf.
• There was a long review by the judge of who was vicariously responsible for the negligence of the relevant personnel who were involved in the incident. It was concluded that in the light of all the circumstances, this was Total.
• Total then sought to rely on various indemnities given to it by Chevron and HOSL respectively to recover losses which it would be likely to incur in the light of the court's findings in respect of vicarious liability.

The key question

The key question was whether these indemnity clauses envisaged recovery by a party where the damage had been caused as a result of its own negligence.

The court stated that the starting point in determining the position was to apply the approach taken in Canada Steamship Lines Limited v R [1952] AC 192.

It would therefore be necessary firstly to see if the indemnity clauses expressly exclude recovery in negligence or not. If the clause refers to negligence (whether it be to exclude or allow for it), then the court would have to give effect to that provision.

Where the clauses do not expressly refer to negligence, it would then be necessary to review the indemnity provisions to ascertain whether the words used in the clauses, when taken in their ordinary meaning, are wide enough to cover negligence. Where there is doubt about whether this is the case, the usual contra proferentem rule is to be applied, so that it will be construed against the person seeking to claim that negligence is covered by the clause.

Where the words are construed to be wide enough to include negligence, it must then be established whether there are a number of other heads of liability to which that clause could apply.

Where the clause envisages recovery under some other ground - for example for breach of contract - then the existence of potential other heads of recovery will be fatal to the negligence claim. This is even where the words are prima facie wide enough to cover negligence. (However, the 'other ground' must not be so fanciful or remote that it could be doubted whether protection under that ground was desired by the parties at the time of entering into the indemnity.)

Application to the facts

In the Colour Quest case, there were two sets of indemnity clauses which Total sought to rely on.

The first (an indemnity given by Chevron in the JV Agreement) did not make any express reference to negligence, and even though the court believed the clause was wide enough for negligence to be covered, there were many other heads of liability to which the clause could apply (such as breach of contract, breach of statutory duty, nuisance, Rylands v Fletcher etc.).

The court therefore found that, in the absence sufficient information which showed the parties' intentions to the contrary, the presumption arising from the Canada Steamship case that liability in negligence was not covered by the clause could not be set aside.

The court went on to state that in any event, it was inherently improbable that a party would agree to indemnify another for negligent conduct caused by the person seeking the indemnity.

In making this statement, the court agreed with the approach taken in Smith v South Wales Switchgear Co Ltd [1978] 1 All ER 18, where it was held that where a party wanted to rely on being able to recover under an indemnity for its own negligence, it should make express provision for it in the drafting of the indemnity clause.

The second indemnity provision Total sought to rely on was given by HOSL, and appeared in the operating regulations dealing with the relationship between the parties. Again, the relevant paragraph did not expressly refer to negligence (although the court noted out of interest that the preceding paragraph did).

The court felt that the failure to refer to negligence in the relevant paragraph was intentional and therefore, in applying the approach in Canada Steamship, the court again felt it was not possible to rebut the presumption that Total's own negligence was not covered by the indemnity clause.

As a result of the above, the court held that Total was not entitled to an indemnity under either the provisions of the JVA or the operating regulations on the basis that the clauses did not intend for this to be the case.