Amoco v. British American Offshore

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Nov 8, 2013 (3 years and 11 months ago)

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Article for Chartered Institute of Arbitrators’ Journal “ARBITRATION”


TITLE

The Award of Costs and Interest on Costs: a Case Note
-

Amoco (UK)
Exploration Company v British American Offshore Limited



AUTHOR


Hew R.

Dundas
,

Dundas

Energy Services.


ABST
RACT


S.63(3) empowers an arbitral tribunal to award recoverable costs on
such basis as it thinks fit and, if it does so, it must specify the basis on
which it has acted. It is unlikely in practice that a tribunal will award
100% of a successful party's co
sts without any moderation or
deduction; if it does moderate, such must be made on some basis and
cannot be arbitrary, random or otherwise. One basis which at least
provides a reference framework for consideration is that of the CPR
which distinguishes be
tween standard and indemnity costs (reflecting
the pre
-
CPR position). On what basis can a Court award indemnity
costs ? The case
Amoco v. British American Offshore

provides useful
guidance regarding the award of indemnity costs in judicial
proceedings;
in addition, the case addresses the uncommon question of
award of interest on costs.


KEYWORDS


Award of costs; standard/indemnity basis; interest on costs



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CASE NOTE

Amoco (UK) Exploration Company v British American Offshore Limited
1
;


1.

Introducti
on

Absent agreement of the parties, S.63(3)
2

states that “ the tribunal may determine by award and the recoverable costs
of the arbitration on such basis as it thinks fit. If it does so, it shall specify
-

(a) the basis on which it has acted, and
(b)....
“. in addition, s.63(5)(a) provides that "the recoverable costs of the arbitration shall be determined on the basis
that there shall be allowed a reasonable amount in respect of all costs reasonably incurred". Unsurprisingly, the Act
specifies no detailed

basis for the award of costs by a tribunal and no interpretation on what constitutes “reasonable” or
“reasonably”, thereby protecting the principle of giving the tribunal wide discretion to adapt its procedures and its
decision
-
making principles to the sp
ecific factors of the case in hand.


As in so many areas of arbitration law, the CPR has no direct impact since, as restated several times in judgements,
arbitration proceedings (other than court proceedings derived from arbitration proceedings) are not go
verned by it
3
.
However, the CPR represents inter alia a framework available for reference by tribunals in arriving at decisions on
procedural matters including the award of costs; while I reject the assertion that the CPR is some kind of a default
framew
ork by which tribunals are bound in the absence of any other considerations
4
, I do assert that the CPR is a good
starting point in many practical instances. In respect of costs, the CPR represents the accumulation of many years of
practical experience and

judicial thinking and may serve as helpful guidance in some arbitral proceedings. In
particular, the questions as to what constitutes a "reasonable amount" are addressed through CPR via the mechanism
distinguishing between standard and indemnity costs.


When can a Court award indemnity costs ? This question was addressed in an extraordinary case
Amoco v. British
American Offshore
5

which, in 2001, went to trial for 85 days and where Amoco’s closing submission was 560 pages,
BAO’s of similar length, and La
ngley J’s judgement runs to over 100,000 words. In brief, Amoco had entered into a 1
-
year offshore drilling contract which, by the time of its commencement, was uneconomic because of the fall in oil prices
and Amoco wished to extricate itself from the con
tract. The manner in which it did so attracted strong criticism from the
judge who, often in trenchant terms, dismissed Amoco’s case, demonstrating significant inconsistencies between its
case at trial and its own documentation. In essence, this massivel
y extended trial substantially arose because of
Amoco’s unjustifiable and unlawful attempt to renege on its contractual obligations. BAO incurred costs in excess of
£15 million and, given that it had won on all the significant issues in the case, should i
t be awarded indemnity costs as
opposed to merely standard costs ? Further, given at that it had expended some of these costs some considerable
time before conclusion of the trial, should it be permitted to recover interest on those costs given the passag
e of time ?



2.

The Facts

In September 1997 Amoco and BAO signed a 1
-
year drilling contract, primarily for an infill development drilling
programme at the Arbroath oil field in the UK North Sea; BAO was to provide a newly
-
built jack
-
up drilling rig, Rowa
n
Gorilla V (the “Rig”) then under construction in the USA with an anticipated delivery date between 1
st

August and 15
th

October 1998 but, as it happened, the Rig was not delivered until December 1998. It was the largest of its type in
existence, weighing

19,300 tonnes with 125m water depth capability, and was the first of a new generation of high
-
specification deep
-
water jack
-
up drilling rigs. The construction of the Rig was carried out by a BAO affiliate
6

and the
approximate cost of construction was $20
0 million, the entire risk of which was born by the Rowan group.


In contrast to many forms of marine charterparty, an offshore drilling contract provides for a service (i.e. the drilling of
wells together with associated operations) not for the hire of th
e unit; operation of the Rig would at all times be by BAO



1


QBD Case 1999 Folio 1159; judgement delivered by Langley J 22
nd

November 2001

2


All section references are to the Arbitration Act 1996 unless stated otherwise; note that s.63(3) partly
reproduces s.18(1) of the Arbitration Act 1950 but s.63(3)(a) is new.

3


However, if costs are to be assessed by the Court under s.63(4), CPR does
apply directly pursuant to Rule
43.2(2)(a)(i) but the Court will take into account matters such as the tribunal would have considered


refer
the criteria listed in Rule 44.5(3).

4


Although Professor Merkin suggests that departure from the “usual principl
es” could give rise to a s.68
challenge to the award (refer “Arbitration Act 1996”; 2
nd

Edition [2000]; LLP/Informa; ISBN 1
-
85978
-
512
-
3),
such principles are those of s.63(5). not those of the CPR.

5


QBD [1999] Case 1159; judgement delivered 16
th

Nove
mber 2001

6


LeTourneau; both it and BAO were part of the Rowan Offshore group, one of the largest offshore and drilling
groups in the world; LeTourneau was the world’s premier jack
-
up constructor, having constructed
approximately 40% of all jack
-
ups pre
sently in service.


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personnel albeit following Amoco’s directions as to what was to be drilled or tested; provided BAO met Amoco’s
operational requirements (including safety), the latter had no right to interfere in
operations. The contract provided for
a fixed day rate of $175,000 with certain deductions in the event that the Rig did not achieve certain performance
criteria; such a rate structure is common in the offshore drilling industry. Similar to the system i
n operation in the
maritime industry, drilling rigs are required to be certified by a classification society
7
. In addition, the Rig’s specification
reflected the UK North Sea regulatory environment which, post Piper Alpha, is a goal
-
setting one rather tha
n a
prescriptive one; provided BAO met the regulatory objectives (including safety) as certified by ABS/DNV the
authorities would not interfere in operations and there was no express right for Amoco to approve or disapprove the
grant of certification. Th
e contract did, however (as is the norm), provide that in the event of breakdown of the Rig
such that it could not carry out drilling operations then for a period BAO would not be paid and, after 30 days of
continuous breakdown, Amoco had the right to term
inate the contract.


After a number of delays in the construction programme, not least because of the unprecedented size of the Rig, it
arrived in Rotterdam in December 1998 and was delivered to Amoco on Christmas Day. During construction, Amoco
had fully

been aware of progress and of the difficulties
8

encountered and had had personnel in the construction yard
and on the Rig itself. In the event that Amoco was dissatisfied with any aspect of the Rig’s construction, it had no
express right to require speci
fic works to be carried out since it was not hiring the Rig itself rather it was hiring BAO to
provide drilling services. The Rig would either achieve ABS/DNV certification or it would not


Amoco was not involved
in that process.


As the time for delivery

of the Rig approached, oil prices were falling sharply and the economics of the infill drilling
programme at the Arbroath field were deteriorating; in particular, Amoco’s two co
-
venturers
9

were highly reluctant to
continue and it was broadly agreed by th
e three companies that Amoco should seek to extricate itself from the BAO
contract as soon as possible. In addition, Amoco had then been taken over by BP and it had become apparent to BP
management that the combined BP/Amoco group had more drilling rigs u
nder contract than it in fact needed and that
the contract with BAO, at a relatively high price given the considerable sophistication of the Rig, was in excess of the
combined group's requirements. Consequently BP also wished Amoco to extricate itself fro
m the contract.


Following various written and other exchanges Amoco/BAO, Amoco purported to terminate the contract on 19th
January 1999, subsequently suing for a declaration that its termination was valid; it sought no damages. BAO
counter
-
sued for hire

from the 25
th

December 1998 until 22
nd

October 1999 at which point the Rig became contracted
to another company in Canada; BAO’s claim for the hire alone and related losses was in excess of $65 million.


In the proceedings in the principal case, Amoco’s
grounds for termination were, in simplified terms, twofold (a) late
delivery of the Rig and (b) that it was unsafe to operate. Langley J, at considerable length
10

and in great detail,
concluded that Amoco had no contractual grounds upon which to terminate
the contract, that the contract had had no
specific delivery date and that Amoco’s arguments regarding the unsafe condition of the Rig were devoid of substance
and, in any event, had been substantially contradicted by the actions of Amoco’s operating perso
nnel and by its own
documentation. In addition the evidence showed that Amoco had taken the relatively minor post
-
construction
operational problems affecting the Rig and had exaggerated them, out of proportion to the facts, into alleged contract
-
terminati
on events
11
.


Concluding, Langley J gave judgement in favour of BAO on almost every ground and rendered judgement
overwhelmingly in its favour; at a separate hearing he considered costs, this being the topic of the present article
.
BAO sought to have the
costs of the proceedings, to which it was entitled, assessed on the indemnity and not the
standard basis and sought a decision in principle that it be paid interest on such costs as it had already paid its own
Solicitors from the date of payment to judgeme
nt.


3.

The Law

Success, however complete, is not sufficient to justify the award of indemnity costs, the general rule being that costs
are to be awarded on the standard basis. CPR rule 44.3 outlines the factors to be considered by the Court and its
discr
etion is to be exercised so as to deal with the case justly; however, the authorities suggest that it is unhelpful to



7


e.g. Lloyd's Register of Shipping, American Bureau of Shipping (ABS), or Det Norske Veritas (DNV); the Rig
used ABS and DNV jointly.

8


These were entirely typical of the construction of the unit of such size.

9


Enterprise Oil and A
merada Hess.

10


The substantive judgement runs to 73,985 words in all or, including appendices,101,946 words.

11


For connoisseurs of robust judicial language, Langley J's analysis and, in particular, his conclusions make
entertaining reading even if those
parties, individual and corporate, strongly criticised in the judgement may
not agree. Analysis of this splendid language is for another time and another place.


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detail when indemnity costs might apply. The difference between the standard and the indemnity bases was stated in
CPR 44.4 terms by Lor
d Woolf in
Petrotrade v Texaco
12
:

(i)

costs unreasonably incurred or unreasonable in amount cannot be recovered on either basis;

(ii)

on the standard basis any doubts as to whether costs were reasonably incurred or are reasonable and
proportionate in amount will be
resolved in favour of the paying party
13
;

(iii)

on an indemnity basis any such doubts are to be resolved in favour of the receiving party
14

i.e. BAO, and
there is no express reference to the need for the costs to be "proportionate" in amount;

(iv)

however, the basic pr
inciple remains that costs, even if indemnity, do not amount to a full recovery of costs
unless all the costs have been reasonably incurred and are reasonable in amount and that there has to be
some added factor to justify departure from the general rule.

If such a factor is to be found it is most likely to
be found in some conduct of the paying party which the Court considers merits sufficient criticism beyond that
which might ordinarily apply in the case of a party which has fought and lost such as to ma
ke it appropriate to
order assessment of costs on the indemnity basis.



4.

The Decision

BAO had submitted that the indemnity basis was appropriate because the proceedings arose from "a deliberate and
calculated policy on the part of Amoco (and BP Amoco) t
o exert unfair commercial pressure on BAO in an attempt to
force BAO to re
-
negotiate what had become a commercially unattractive contract. That policy [had] led to a cold
calculated decision to terminate that contract for economic reasons and eventually le
d Amoco to seek to support its
purported termination by advancing an artificial and theoretical case based on so
-
called safety considerations which
was wholly divorced from reality and from the true facts as they appear clearly from the contemporaneous
doc
uments"
15
.


Langley J, while not fully endorsing that language in its entirety, considered that Amoco had done its best to put
commercial pressure on BAO to re
-
negotiate a freely
-
negotiated commercial contract and to do so against the risk of
termination of

the contract and of the litigation which would inevitably ensue. Amoco’s objective had been to escape
from the contract, not because of any shortcomings of the Rig but because the drilling project had become uneconomic
at the contractual dayrate; Amoco
had taken a commercial view on the litigation. Its case at trial had differed very
substantially as to both fact and law from that documented at the time of termination and the former could not then
have been in Amoco’s mind. That case had failed comprehe
nsively, much of the earlier case having had to be
discarded.


Consequently, Langley J concluded that Amoco had conducted itself substantially on the basis that its commercial
interests had taken precedence over the rights and wrongs of the actual situatio
n and that it had been prepared to risk
litigation should BAO take on the challenge. This it had done, to be met with a constantly changing case as Amoco
sought unsuccessfully to find a basis on which to justify its actions; if a party embarked on litiga
tion on this scale and
suffers such a resounding defeat, involving the rejection of much of its evidence, that provided a proper basis on which
the indemnity basis was appropriate and BAO should now recover all its costs unless Amoco could demonstrate
unre
asonability. It should be noted that while it was a particular feature of this case that the termination of the contract
was subject to considerable publicity, there could be no compensation for the disruption, executive time and
commercial uncertainty su
ffered by BAO and Rowan. An order for indemnity costs would not penalise Amoco but
would instead provide, imperfectly, some recompense for BAO to mitigate the injustice it had suffered. The order for
indemnity costs was therefore made.


The question of i
nterest on costs derives from CPR 44.3(6)(g) which conveys the necessary discretion but there was
almost no authority on how it should be exercised
16
. In substantial proceedings involving commercial interests of
significant importance both in balance sheet

and reputational terms, Langley J considered that the Court should, in
general, award interest on costs where substantial sums have been expended perhaps a year or more before an
award of costs is made. In the present case BAO's costs totalled in excess
of £16m (exclusive of VAT) and he
accepted that that costs of such an order had to be financed over a substantial period of time and consequently that,
for broadly similar reasons as had led him to order indemnity costs, it would be appropriate in principl
e to award
interest upon such costs from payment to judgement.





12


An unreported decision of the Court of Appeal dated 23
rd

May 2000 at paragraphs 62
-
63.

13


Ru
le 44.4(2)(a); note that “paying party” refers to the party who ultimately pays, here Amoco.

14


Rule 44.4(3).

15


Per Counsel for BAO.

16


The decision of Ferris J in
Sir Elton John and others v Price Waterhouse and others

(unreported 12 July
2001) at parag
raphs 36 to 41 was cited, in particular (paragraph 40) that the fact that the costs involved had
been large did not carry very great weight; in that case the relevant sum seems to have been about £3m.


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However, the application for interest came very late but it had been agreed that, in related proceedings in Texas,
Rowan had claimed against BP Amoco and others for substantial losses which ap
peared to cover the interest claim;
while BAO accepted that credit would have to be given to avoid any double recovery, such an approach would be
complex. Further, Langley J considered that it would be unfair to Amoco to have to face apparently overlappi
ng claims
and concluded that, Rowan having sought relief in Texas, it would be inappropriate to order Amoco to pay interest on
BAO’s costs in England,; the latter’s application was therefore refused.



5.

Comment/Concluding Remarks

This case has proved co
ntroversial, not only in the oil industry, and Langley’s J’s robust style has won general, but not
universal, approval from the industry. Given the magnitude of the sums in issue, the length of the trial, the “cast of
thousands” and the relative absence o
f authority on the award of indemnity costs, it would be reasonable to assume
that an appeal would follow; however, the oil industry has a long tradition of settling the overwhelming majority of its
disputes privately
17

and my experience would suggest to m
e that this case was ripe for a private settlement.


That said, this judgement represents the state of English law for the present and the provisions of and criteria listed in
CPR Rules 44.3(4), 44.3(5) and 44.5(3), general as they may appear, are fleshed
out in Langley J’s vigorous prose. In
circumstances such as the present one, where it could be concluded that Amoco manufactured a spurious termination
in contradiction of the facts, its own documentation and the law, the imposition of indemnity costs wil
l follow.


As traditionally seen by the oil industry contractor/supplier fraternities, the oil companies have significant advantages
both through greater economic weight (with consequently larger legal budgets) and through controlling the award of the
next

contract with the general outcome that the contractor/suppliers are on a ‘hiding to nothing’ in taking the oil
companies on. In this case Rowan/BAO was big enough and tough enough to fight back and the dynamics of the
industry may change following the tw
o judgements in this dispute. I pose, but do not seek to answer, the question of
whether there are lessons to be learned here by the UK onshore civil engineering/construction industry.


For arbitrators looking at costs awards, the way forward is clear for

the present: the judiciary will support a robust
interpretation of the factors affecting the award of costs including assessment of the

conduct of the parties which
includes (a) conduct before, as well as during, the arbitral proceedings; (b) whether it

was reasonable for a party to
raise, pursue or contest a particular allegation or issue; (c) the manner in which a party has pursued or defended his
case or a particular allegation or issue; and (d) whether a claimant who has succeeded in his claim, in w
hole or in part,
exaggerated his claim
18
.


Postscript: in 1981 the author was involved in a near
-
identical instance of a rig being taken on a 5
-
year contract just
before rig rates halved; we had made a bad deal but it was a binding deal and we stuck to it

until we bought ourselves
out of it through an amicable settlement with the rig contractor; no thought of litigation ever crossed our minds


we
had no case to litigate.
19





17


In more than 20 years as a lawyer in the oil indust
ry I have never litigated and never arbitrated any dispute,
always settled; my presentation to CIArb Scottish Branch on 9
th

October 2001 “Dispute Resolution in the Oil
& Gas Industry” explored some of the reasons behind this.

18


CPR 44.3(5).

19


3,294 word
s including, 2,880 excluding, footnotes.