Sub-contractors take advantage of clauses in prime contract

In a recent case, Owners of ship Borvigilant v Owners of ship Romania G, the court upheld the principle that where a company employs a contractor, the contractor may act as agent for its sub-contractors when dealing with the company even if those sub-contractors have not yet been selected.

In this case the Romania G's owners entered into a contract with the National Iranian Oil Company ("NIOC") to supply tugs to assist in berthing the Romania G. NIOC then chartered a tug, the Borvigilant, from Borkan General Trading ("Borkan") to carry out the contract. During berthing the Borvigilant was run down, resulting in loss of life and damage to both vessels. Borkan claimed damages in contract and tort from the owners of the Romania G who counter claimed damages in tort from Borkan.

For its claim, Borkan sought to rely on a clause in the contract which stated that NIOC could perform its obligations by using tugs available to it under charterparties and that the owners of such tugs had the benefit of the conditions to the same extent as NIOC. As a defence to the counter claim, Borkan cited a number of exclusion clauses in the contract. The Romania G's owners contested that under basic contract law Borkan had no right to sue on the contract as it was not a party to it, regardless of what provisions the contract contained. Borkan could not rely on the Contracts (Rights of Third Parties) Act 1999 as the Act only came into force after the incident had taken place.

The court found that in this case Borkan was permitted to rely on the provisions of the contract to claim damages from the Romania G's owners and in order to claim the benefit of exclusion clauses.

The court held that NIOC was acting as agent for Borkan in concluding the contract and that the Romania G's owners were aware of this. The court considered a number of arguments in reaching its conclusion.

• Relationship of agency between NIOC and Borkan That NIOC had authority to conclude the contract as Borkan's agent was implied by course of dealings. The relevant factors were: there was no opportunity for direct negotiation between Borkan and the individual tanker owners;the arrangement between Borkan and NIOC provided that NIOC would obtain the consent of ship owners;the forms contained terms as to liability and indemnity which were commonplace in the industry;the process had been followed on numerous previous occasions with Borkan tugs over a period of four years.

• Owners of the ship Romania G's awareness of agency relationship The clause in the contract which allowed NIOC to perform its obligations by using tugs available to it under charterparties implied that the agency relationship existed since it allowed the owners of such tugs the benefit of the conditions of the contract to the same extent as NIOC.

• Ratification of the contract Even if NIOC had no actual authority to act as agent, Borkan had since ratified the contract. After the incident, Borkan sought and obtained confirmation from NIOC that the tug was covered by the contract. Ratification is not permitted where this would unfairly prejudice a third party. The court held that since there was no evidence that the Romania G's owners took any step in the mistaken belief that Borkan would not ratify the contract, they would not be unfairly prejudiced by the ratification.

Although the result was ultimately satisfactory for the sub-contractor, this case demonstrates the hurdles which must be overcome in establishing the existence of an agency relationship in these circumstances. The Contract (Rights of Third Parties) Act 1998 is now commonly used in oil industry agreements to enable sub-contractors and affiliates to take the benefit of indemnities and exclusions in the prime contract and underlies the recent Industry Hold Harmless Indemnity Scheme.

For more information on the case or on the application of the Act, please contact Judith Aldersey-Williams in our Aberdeen office at [email protected] or on +44(0)1224 622 002