Knock-for-knock indemnities : risk allocation in offshore energy contracts
Knock-for-knock indemnities : risk allocation in offshore energy contracts
Produced in partnership with Nicholas Neuberger of Bracewell LLP and Robert Meade of Bracewell LLP
What are knock-for-knock indemnities ?
A knock-for-knock clause is a reciprocal agreement to apportion liability for certain losses ( usually , death or injury to personnel and damage to property ) between contracting parties , supported by mutual indemnities .
A knock-for-knock regime replaces the fault-based liability regime that would otherwise apply at law with the concept that ‘ loss lies where it falls ’.
They are a common risk allocation mechanism in the offshore oil and gas industry utilised to provide certainty and prevent recourse against other parties . They are also increasingly common in other complex offshore projects , such as offshore wind projects .
What are the key features of a knock-for-knock clause ?
Knock-for-knock clauses generally maintain the principle that damage and loss to property or personnel suffered by a party ’ s ‘ group ’ ( as defined in the relevant contract ) is borne by that party regardless of fault . The party ’ s group can be extended to include its various subcontractors , affiliates and , in some circumstances , other contractors .
Standard form contracts provided by industry bodies ( such as LOGIC ) are frequently used by parties for the purposes of complex offshore projects . Even when those standard forms are adopted , bespoke amendments are often made during the negotiation process . This has resulted in a large body of similar , yet different , knock-for-knock clauses being used . Each must be interpreted according to its context and the specific language used .
By way of example , in LOGIC ’ s General Conditions of Contract for Marine Construction , Edition 3 ( May 2021 ) the knock-for-knock indemnity is found in section 21.1 and section 21.2 .
Nevertheless , most knock-for-knock clauses will have the following features :
• they will be mutual . It is fundamental to the knock-for-knock regime that each party accepts liability for losses to its own property or suffered by its own employees and indemnifies its counterparty in respect of liability arising from the same
• their scope will extend beyond the contracting parties to include , for example , losses suffered by a contracting party ’ s subcontractors , affiliates , directors , officers and employees
• they will set out ( with more or less particularity ):
– who is covered ( eg just the parties or also their subcontractors , affiliates , directors , officers and employees )
– what is covered ( eg what types of losses will be covered by the clause — in offshore oil and gas contracts , for example , it is not uncommon for losses resulting from environmental harm / pollution to also be included ); and
– when claims can be brought
• they will be stated to apply irrespective of the cause of the loss and , frequently , irrespective of a party ’ s negligence or breach of duty
What are the benefits of knock-for-knock indemnities ?
A knock-for-knock clause offers certainty and clarity to the parties and their insurers . It is an agreement between the parties to contract out of remedies to which they would otherwise be entitled and it clearly establishes where liability lies . Because there is no requirement to show cause , fault or blame there is less scope for dispute . This reduces the chance of litigation or arbitration and also promotes transparency .
Knock-for-knock clauses may also reduce duplication in the parties ’ respective insurance policies , by removing the need to consider ( or pay for ) insurance in respect of other parties ’ property . This leads to cost savings .