SEADRILL MANAGEMENT SERVICES LTD V OAO GAZPROM

[2009] EWHC 1530 (Comm), Queen's Bench Division, Commercial Court, Mr Justice Flaux, 1 July 2009

Contract – Drilling rig damaged and towed away for repairs – Repairs included preparation for the next fixture – Whether claimant had renounced the contract by preparing for next fixture – Whether repudiatory breach – International Daywork Drilling Contract-Offshore 1989 form

A jack-up oil drilling rig had been provided by the claimant to the defendant under a contract on International Daywork Drilling Contract-Offshore (IDDCO) form for the defendant’s drilling project in the Bay of Bengal. It was damaged during drilling and taken to a Singapore yard for repairs and at the same time underwent an upgrade for its next fixture which was in Indonesia. It was common ground that the damage was caused by the negligent acts of Seadrill on 9 January 2009. A number of issues fell to be determined. Flaux J held as follows. On the evidence, there had been no binding variation of the agreement whereby Gazprom would pay Seadrill’s invoices only if Seadrill were able to procure a substitute rig. While it was common ground that there had been negligence on the part of the Master, the judge declined to make a finding of incompetence in respect of the whole operation, although certain elements of it were incompetent, saying that it would have made no difference given that there was no obligation of seaworthiness in respect of the rig and in particular, that it was the continued ballasting after 02.00 on 9 January 2006 which was the cause of the damage, and not any preceding negligence or indeed incompetence. Whether the conduct was negligent or incompetent did not help in determining whether the conduct amounted to repudiatory breach – in fact it was irrelevant because the question was not the characterisation of the conduct but rather whether the consequences of the conduct were serious enough to go to the root of the contract. There had been no repudiatory breach by Seadrill entitling Gazprom to terminate the contract. Although the issue of whether the breach has deprived the innocent party of substantially the whole benefit of the contract was to be judged as at the date of the breach, the judge still did not consider that the delay in performance caused by an alleged breach of duty of care and skill was a frustrating delay making the breach repudiatory. The contract did not contain any time limits regarding commencement, duration or completion so that the parties had not agreed that drilling must be completed by May 2006 (as argued by Gazprom). There was no implied or express term for due despatch. Gazprom’s argument that Seadrill had renounced the contract by their conduct in relation to the next fixture of the rig, so that Gazprom was entitled to treat it as at an end, would be rejected. The question was whether by its words or conduct, a party had evinced an intention not to perform the contract, which a reasonable person in the position of the other, innocent, party would regard as clear and absolute. But even if all the matters in relation to the next fixture had been known to Gazprom at the time, Seadrill’s conduct would not have amounted to a renunciation of the contract. Seadrill’s claim for hire succeeded for the period from 18.00 on 23 November 2005 (when it jacked down at Dubai, the place of mobilisation under the contract) to 06.00 on 9 January 2006 (the date of the incident). The claim for uninsured repair costs and expenditure arising out of the incident failed because Seadrill’s contention that Gazprom must bear the liability for supplying an unsound drilling location was unsupported. The claims for hire after 06.00 on 9 January 2006 and for towage and insurance of the tow to Singapore failed for circuity of action – para 606 of IDDCO was in essence a pay-first clause which would have obliged Gazprom to pay the hire, maintaining Seadrill’s cash flow, but since they did not pay the hire at the time they did not have to pay now only to then recover the wasted hire as damages for breach of contract. Even if there had been a repudiatory breach by Seadrill, any damages recoverable as a consequence of that repudiation would be merely nominal since if Gazprom had not terminated, Seadrill would have done so. Gazprom was entitled to recover as damages for non-repudiatory breach, wasted costs and expenses in relation to the rig to the extent that they were truly wasted as a consequence of Seadrill's breach but was not entitled to recover any costs and expenses in relation to the replacement rig, to the extent that those costs and expenses would have been incurred anyway in relation to the drilling of the second well.