Facts 
Caledonian North Sea operated the Piper Alpha oil platform on behalf of a consortium of companies. 37 of the 226 people working on the platform were employed by the operator; the remaining 189 were employees of numerous contractors hired to carry out specific tasks.The disaster on 6 July 1988 killed 165 and injured 61. Investigations showed that the initial explosion was caused by the negligence of two people - an employee of a specialist valve contractor and an employee of the operator.

The operator and its insurers settled all claims in respect of all those killed or injured. Since, however, they felt there was a real risk that, if matters could not be settled, claims might be pursued successfully in Texas, the overall settlement figures were more than would have been awarded in Scotland, but less than would have been awarded in Texas. They now sought an indemnity from the contractors in respect of payments relating to the contractors' employees.

Under sub-clause 15(1) of the contracts, the contractors agreed to indemnify the operator against claims and liabilities, including, at 15(1)(c), the personal injury or death of the contractors’ employees, irrespective of any contributory negligence, unless the injury or death was caused by the sole negligence or wilful misconduct of the operator. Clause 21 excluded any liability for indirect or consequential losses, including loss of use, loss of profits, loss of production or business interruption.

The Issues
1. The contractors argued that they could not be liable to indemnify the operator unless they were themselves liable to their employees in negligence or breach of statutory duty.

2. The contractors also argued that their liability to the operator had been discharged by the payments made by the operator’s insurers. They maintained that an insurer who has agreed to indemnify against a loss stands on an equal footing with another party who has contracted to indemnify against the same loss, so that payment by one discharges the liability of the other. This might give rise to an action for a contribution, but not a subrogated claim brought in the name of the party indemnified.

3. The contractors argued that the damages over and above what would normally have been awarded in Scotland were consequential losses and so fell within clause 21 and were unrecoverable.

Judgment 
On the first issue, the Law Lords did not accept the contractors’ argument. The indemnity provisions said nothing about the contractors having to be liable to the employees. The only exception to the general liability to indemnify was in cases where the accident was attributable to the sole negligence or wilful misconduct of the operator. This accorded with normal practice in the oil industry.

On the second issue, the Law Lords found that it has been settled law in Scotland and England for over two centuries that payment under an insurance policy does not relieve the liability of a third party against whom the insured has a claim in contract or tort. Mason v Sainsbury (1782) 3 Douglas 61 concerned a subrogated claim brought by insurers against the relevant authority for damage caused by a riot, for which the householder had already been indemnified under his insurance policy. The authority was held liable to pay.

The central question in Mason v Sainsbury was equally relevant here – "Who is first liable?" Applying this approach to the present case, Lord Mackay asked "Is the contractor liable to indemnify the operator only if and to the extent that the operator's insurer fails to do so, or is the operator's insurer liable to indemnify the operator only if and to the extent that the contractor fails to do so?

It was held there were no grounds for suggesting the contractors' liability depended on whether or not insurers had paid up. There was no provision in the contracts requiring the operator to obtain insurance. The fact that the operator had voluntarily done so made no difference to the contractors’ primary liability. There was nothing to suggest the parties had intended any insurances available to the operator to be anything other than secondary to the contractors' liability.

On the third issue, the House of Lords disagreed with the contractors’ proposition. The primary liability was for death and personal injury to the relatives and victims, so clause 21 simply did not apply. The fact that the settlement was higher than perhaps would have been awarded in a Scottish court was merely a matter of quantification of damages. The Inner House of the Court of Session in Scotland had found that the settlement was reasonable and this was sufficient to make the sums paid recoverable under the contractual indemnities.