The Hidden Dangers Of 'Knock for Knock' Indemnities

Author:Mr David Gardner
Profession:Curtis Davis Garrard
 
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Basic Scheme of Knock for Knock

The underlying principles of a "knock for knock"

scheme are well established. Each of the Company and the Contractor

agrees to save, indemnify and hold harmless the other, their

affiliates and other group members against any claims or

liabilities arising in respect of: (i) damage to property owned,

hired or leased by it; and (ii) injury to any of its personnel.

Although this is not usually expressly stated, the effect will be

to exclude any liability on the part of the Contractor for damage

or injury caused to Company Group property and personnel and vice

versa.

In the absence of such indemnities, the rights and obligations

of the parties will be determined by the terms of their contract or

by the general principles of tort (negligence) liability applicable

in the country where the damage occurs. The effect therefore of an

indemnity expressed to apply irrespective of negligence is to

reverse the legal position applicable in most jurisdictions that

the party at fault in causing the damage or injury is liable. Under

a "knock for knock" scheme, each party is obliged to meet

any claims arising from damage to its property and personnel even

if the damage is caused by fault on the part of others.

Such indemnities in common with exclusion and limitation clauses

are interpreted restrictively under English law and, in the case of

ambiguity, will be construed in the manner least favourable to the

party seeking its protection. In particular an English court or

arbitration tribunal will be reluctant to conclude that one party

intended to indemnify the other against the consequences of its own

negligence, unless the indemnity clearly states that this is to be

the case.

The Extent of the Groups

One of the principal purposes of such indemnities is to limit

the substantial risks involved in any significant off shore project

to a level acceptable to most contractors and to avoid the need for

multiple and overlapping layers of insurance by permitting the

Company and the various contractors to carry insurance covering

their own equipment and personnel rather than the damage this

equipment and personnel can cause. Any significant off shore

development will however involve numerous contractors and

subcontractors and the "knock for knock" scheme will

usually be extended to all members of each party's group. Thus

the Contractor and the Company indemnify each other against any

claims arising in connection with damage to property or injury to

personnel of any member of their respective groups, including if

they fall within the group any subcontractors and agents.

Thus, if the Contractor is held liable for damage caused to

property belonging to a member of the Company's Group, the

Company will be obliged to indemnify the Contractor against this

liability. The Company Group member may be entitled to bring its

claim against the Contractor but will, where it is operating under

a parallel indemnity scheme with the Company, be obliged to

indemnify the Company against its liability to the Contractor,

thereby rendering the process circular.

The ambit of the Company and Contractor groups will however

often be the subject of considerable disagreement with the larger

oil companies in particular being reluctant to extend their

indemnities to cover damage and injury caused to all of their

contractors and their property. This reluctance reflects the

administration required, the extent of the risk involved in

obtaining "back to back" indemnities from these

contractors and in some cases the complexity of field ownership

structures.

Breach of Contract

Although the principle that the mutual "knock for

knock" indemnities apply irrespective of negligence is well

established, much less consideration is often given at the drafting

stage to the...

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