Oil and gas operations are carried out in some of the most volatile working environments on the planet, with grave risks including personal injury and damage to property. From a legal perspective, risk allocation plays an integral role in the commercial structure of the offshore industry. Who deals with the (potentially catastrophic) consequences if things go wrong?
Generally, the at law position is that liability is determined on the basis of fault, with the concept that "loss lies where it falls". However, oil and gas contracts regularly reallocate risk in the form of mutual indemnity hold harmless provisions (more commonly known as a “knock-for-knock" indemnity regime). A knock-for-knock regime is a reciprocal arrangement whereby contracting parties agree to apportion liability for certain losses, supported by mutual indemnities.
This risk allocation mechanism is intended to allow insurable outcomes for parties and provide certainty between contracting parties. Accordingly, clarity is crucial when drafting knock-for-knock indemnity provisions. Such provisions should be completely reciprocal, meaning each party accepts liability (and holds the other party harmless) in respect of losses for their own personnel and property. The following particular points should be considered:
- The extent of the indemnities and, in particular, whether they should be limited to the contracting parties themselves or extended to their subcontractors, affiliates, directors and employees;
- The liabilities to be covered by the indemnities and whether there should be any carve outs – are the indemnities intended to cover loss arising out of negligence or breach of contract; and
- The losses covered by the indemnity – consider whether the indemnity is intended to cover consequential loss or statutory liabilities.
Well drafted knock-for-knock provisions should mitigate the complexities of post-event liability allocation between the parties. In turn, this will minimise the scope for dispute and potentially lengthy and costly legal proceedings. Not only do formal proceedings use up valuable company resources, but, in the case of litigation, are heard in an open forum with details of the case entering the public domain.
Of course, disputes can still arise in circumstances where there are knock-for-knock provisions in place between the parties – parties will not necessarily agree that certain events are (or are not) covered by the terms of the indemnity. This does not commonly reach the stage of court proceedings but has been the subject of consideration by the courts from time to time.
An example of such a case is Campbell v Conoco (UK) Ltd & Ors [2002] EWCA Civ 704. In this case, it was held that a chain of contractual indemnity liability had been established following injuries sustained by the claimant. The claimant suffered serious injuries as a result of an escape of steam in the location in which he was working. The accident did not occur as a result of the works being carried out by the claimant, or indeed under the relevant subcontract. However, the subcontract had been entered into on a "back to back" basis with the main contract. Both contracts contained provisions which stated that parties would indemnify each other in respect of injuries suffered "in connection with" the contract.
It was held that the words "in connection with" had a wide application – there was no need to prove causation between the works and the injury. There was nothing in the contract to suggest that liability extended only to claims relating to injuries which arose from the performance or non-performance of the contract.
Statutory considerations should be borne in mind. The case of Farstad Supply AS v Enviroco Limited and Asco UK Limited [2010] UKSC 18 is a Supreme Court case which dealt with a dispute about hold harmless provisions. Farstad Supply AS ("Farstad") owned a supply vessel which was damaged by fire during a period of charter by Asco UK Limited ("Asco"). Asco had engaged Enviroco Limited ("Enviroco") to clean out tanks on the vessel at the time of the fire. After the fire, Farstad sued Enviroco for damages, on the basis that the fire was allegedly caused by the negligence of Enviroco's employees. Enviroco alleged contributory negligence and sought a financial contribution from Asco, with reliance upon Section 3(2) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1940 ("the 1940 Act"). This section deals with contributions amongst joint wrongdoers.
In terms of the charterparty, Farstad was to "defend, indemnify and hold harmless" Asco from all liabilities resulting from damage to the vessel. Accordingly, if Enviroco was entitled to a contribution under the 1940 Act, it followed that Asco would be entitled to be indemnified by Farstad. The Court first ruled that Enviroco was not entitled to a contribution from Asco. This decision was appealed and reversed. However, on final appeal, the Supreme Court agreed with the first instance decision.
It is difficult, and in some circumstances impossible, to exclude the risk of formal dispute resolution proceedings entirely. However, the more precise the wording of the relevant provisions (and the contract as a whole), the more likely that (i) such proceedings will not be necessary or (ii) if they become necessary a favourable result will be achieved.
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