Reviewing Knock for Knock Indemnities: Risk Allocation in Maritime and Offshore Oil and Gas Contracts

• Author: Pat Saraceni - Nicholas James Summers
• Position: Dr. Pat Saraceni, Director of Litigation & Dispute Resolution, Perth, Clifford Chance; BJurs/LLB(UWA), LLM(UWA), SJD(UWA); Nicholas Summers, Associate, Clifford Chance; BComm/LLB(Murdoch), LLM(Uni Melb)
• Pages: 28-43

(2016) 30 ANZ Mar LJ

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REVIEWING KNOCK FOR KNOCK INDEMNITIES: RISK ALLOCATION IN

MARITIME AND OFFSHORE OIL AND GAS CONTRACTS

Dr Pa t Sa ra ce ni and Nic holas Summe rs*

1 Intro ductio n

Participants in the maritime and offshore oil and gas sectors operate in a unique environment, characterised by

inherently hazardous conditions, high financial stakes and the potential for catastrophe around every corner if

things go awry. A knock for knock regime is an effective contractual tool that offers parties certaint y.

Knock for knock clauses first appeared in the context of motor insurance in the early 20th Century.1 These clauses

entered the maritime and energy sectors in the 1960s with the co mmencement of the North Sea oil and gas

exploration. Most maritime and offshore oil and gas contracts now contain a knock for knock regime which either

adopts standard industry wording or forms part of a standard form contract.2 A number of the standard BIMCO

forms which contain knock for knock clauses include TOWCON, TOWHIRE, SUPPLYTIME, and

HEAVYCON.3

The Lord President in Caledonia North of the Sea Ltd v London Bridge Engineering Ltd4 commented that such

indemnification is ‘fundamental to the economics of the North Sea operation’.5 Those remarks are apposite to

other operations around the world.

Under a typical knock for knock regime, parties agree that the loss lies where it falls, irrespective of fault and

without recourse to other parties. This is accompanied by a series of mutual indemnities, all of which lead s to

circuity of action among contracting parties. In essence, each party is responsible for and agrees to indemnify the

other contracting parties against injury to, or death of, its own personnel, loss or damage to its property and any

other specified losses, for example, consequential loss or environmental liability.

The significant advantages of knock for knock clauses are well documented – from fixing liability at the time of

contracting to r educing insurance costs, simplifying (or ideall y avoiding) the time, expense and difficulties

inherent in attributing fault from both a factual and legal per spective, facilita ting expeditious payments of

compensation to injured parties where appropriate and encouraging co -operation in establishing and maintaining

safe operational practices. The advantages of expediency and co-operation are particularly attractive in light of

the complexities inherent in incidents involving multiple parties.

Knock for knock clauses generally have the following features:6

 the primary parties and their employees and sub-contractors constitute a ‘group’ for purposes of risk

allocation purposes;

 damage and loss suffered by a member of the primary part y’s group is borne by that primary party

regardless of fault – the loss lies where it falls;

* Dr. Pat Saraceni, Director of Litigation & Dispute Resolution, Perth, Clifford Chance; BJurs/LLB(UWA), LLM(UWA), SJD(UWA);

Nicholas Summers, Associate, Clifford Chance; BComm/LLB(Murdoch), LLM(Uni Melb).

1 Bell Assurance Association v Licenses & General Insurance Corporation & Guarantee Fund Ltd (1923) 17 Lloyd’s Rep. 100.

2 S Rainey, ‘The Construction of Mutual Indemnities and Knock-for-Knock Clauses’ in B Soyer and A Tettenborn (eds), Offshore Contracts

and Liabilities (Routledge, 2015) 68, 78–9.

3 See also the industry initiative in the United Kingdom offshore oil and gas sector (LOGIC) which resulted in the development of an

industry scheme of a mutual hold harmless deed (IMHH) which aims to fill the contractual lacuna that often exists between contractors

working on the UK Continental Shelf concerning risk allocation. Often the contractual relationship between the contractors and the

subcontractors is vertical only. IMHH is a background agreement to cater for situations where there is no direct privity of contract between

the various contractors. IMHH applies to the UK’s territory of the Irish Sea and the North Sea. The list of signatories to the IMHH is

substantial: http://www.logic-oil.com/imhh/general-guidance.

4 [2000] Lloyd’s Rep IR 249; sometimes referred to as the London Bridge Engineers case.

5 Lord Bingham also referred to knock for knock indemnities that cover employees as a ‘market practice [that] has developed to take

account of the peculiar features of offshore operations.’

6 R Williams, ‘Knock for Knock Clauses in Offshore Contracts’ in B Soyer and A Tettenborn (eds), Offshore Contracts and Liabilities

(Routledge, 2015) 53, 56–7.

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 group members (including employees, age nts and subcontractors) have t he same protection as the

primary party by virtue of a Himalaya clause;7

 the allocation of risk is accompanied by an indemnity o f other primary p arties and their groups against

any liability for claims, irrespective of fault. Where possible, the indemnity covers liability for employees

and property of all parties for whose benefit the work is being undertaken; 8 and

 primary parties have insurance coverage to protect against losses and to underwrite their obligation to

indemnify other primary parties and their groups.9 The insurers are generally required to waive their

rights of subrogation against the other primary parties and their groups.10 The contract may r equire that

each party be named in the other party’s insurance contract.

Knock for knock regimes are a simple, consensual scheme of mutual risk allocation. The clauses should be mutual

or co-extensive to cover the same liabilities. Notwithstanding this mutuality, knock for knock indemnities can be

construed as contractual e xclusion clauses, with each party seekin g: (a) to exclude its own liability for losse s to

other parties, even if caused by its own fault; and (b) to obtain an indemnify from other parties for any liability to

which it may be exposed, such as to third parties or the other parties’ employees, irrespective of fault. The parties

contract out of remedies to which they would otherwise be entitled. 11 In some jurisdictions as we will see below,

the proper characterisation of knock for knock clauses may potentially impact on their construction.

2 Knock for Knock Clauses in Action

Where better to see knock for knock clauses in action than in the litigious aftermath of the Piper Alpha and

Deepwater Horizon incidents.

2.1 Piper Alpha

On 6 July 1988, off the coast of Aberdeen, two rescuers and 226 workers were killed and or injured in what was

the world’s deadliest ever oil rig accident. Piper Alpha was once Britain’s largest oil and gas producing platform,

producing over 300,000 barrels of crude a day (10% of the country’s tota l). The accident cost the Lloyd’s

insurance market over £1bn, making it the largest insured man-made catastrophe. The platform was owned by a

consortium of companies including Texaco and was operated by Occidental.

The initial explosion was caused by an employee of Occidental who started a pump without noticing that a

pressure safety valve had been removed for maintenance b y a specialist valve contractor engaged by Occide ntal.

Due to the negligence of both the operator and valve contractor, hydrocarbons escaped and ignited when the pump

was engaged.

Most of the dead and injured were employed by various contractors hired under a series of contracts to perform

specific tasks on the platform. The claimants alleged breach of statutory duty and negligence on the part of the

operator. Initially, Occidental settled claims by the victims and their dependants for £66m. Subsequently,

Occidental’s insurer instituted a series of subrogated proceedings in England and Scotland against twenty-four

contractors seeking indemnity under the knock for knock provisions in the respecti ve contracts.

7 A Himalaya clause extends the benefit of the indemnity of the primary party to other members of the group. The concept of a Himalaya

clause arose out of the decision in Adler v Dickson; The Himalaya [1955] 1 QB 158; Port Jackson Stevedoring Pty Ltd v Salmond &

Spraggon (Australia) Pty Ltd (1978) 139 CLR 231; Article IV bis (2) of the Hague-Visby Rules; and M White, Australian Maritime Law

(Federation Press, 3rd ed, 2014), 4.5.8.

8 Standard P&I Club Bulletin, November 2008.

9 Section 21 of the Insurance Contracts Act 1984 (Cth) provides that an insured has a duty to disclose to the insurer, before entry into the

contract of insurance, every matter that is known to the insured that: (a) the insured knows to be relevant to the decision of the insurer

whether to accept the risk and, if so, on what terms; or (b) a reasonable person in the circumstances could be expected to know would be

relevant. Whether the insured has entered into any cross-indemnities which may expose the insurer to additional risk, is relevant to the

insurer’s decision.

10 Parties should ensure that the waiver of subrogation is limited to those claims that fall within the scope of the knock for knock provisions

of the contract, and extends to all potential claims.

11 S Rainey, ‘The Construction of Mutual Indemnities and Knock-for-Knock Clauses’ in B Soyer and A Tettenborn (eds), Offshore

Contracts and Liabilities (Routledge, 2015) 68, 71.