Why are knock-for-knock indemnities used in offshore energy industries ?
The advantages of knock-for-knock clauses are of particular benefit in services agreements , and operation and maintenance agreements , as well as in complex projects involving multiple parties where , in each case , significant loss can arise from accidents and other incidents .
The House of Lords noted in Caledonia North Sea Ltd v British Telecommunications plc ( Lord Bingham at paragraph 2 ) that the offshore oil and gas environment includes a mixture of manual labour , expensive infrastructure , unpredictable and severe weather conditions , the sea and hydrocarbons . A similar risk profile applies to other complex offshore projects , such as offshore wind projects , with hydrocarbons substituted for complex electrical systems and , often , even more extreme weather conditions ( given that strong wind is a fundamental requirement of the location of the infrastructure ). To say the offshore environment it is not without its risks is an understatement .
In the offshore energy industry , the prospect of a significant and costly accident occurring can never be discounted . Proving blame through litigation or arbitration can be a time consuming and expensive exercise . Pre-agreed knock-for-knock clause can mitigate the complexities of post-event liability allocation between contracting parties .
Their effectiveness in the offshore oil and gas industry was expressly recognised by the House of Lords in the litigation flowing from the Piper Alpha disaster ( see Practice Note : Health and safety in the offshore oil and gas sector — safety case regime for more information ).
Removing the need to prove blame also promotes transparency . This is vitally important in the context of offshore projects , where safety is of fundamental importance . If an accident occurs , rather than defending positions or arguing over fault , the knock for knock regime allows parties to work together to ensure that it does not occur again .
References :
Caledonia North Sea Ltd v British Telecommunications plc [ 2002 ] UKHL 4 , Lord Bingham at paras [ 7 ]–[ 9 ] and Lord Hoffman at paras [ 81 ] and [ 82 ]
References :
Caledonia North Sea Ltd v British Telecommunications plc [ 2002 ] UKHL 4 , Lord Bingham at paras [ 7 ]–[ 9 ] and Lord Hoffman at paras [ 81 ] and [ 82 ]
When are knock-for-knock indemnities used in the offshore energy industry ?
An operator will typically enter into numerous high value agreements with contractors to carry out standard industry services . These services will often involve various subcontractors . It is common for a knock-for-knock clause to be negotiated in these service agreements including , for example , in drilling contracts , turbine installation contracts , sales and transportation , processing and operating services agreements , operation and maintenance agreements and EPC contracts .
The oil and gas industry has also seen an expansion of knock-for-knock clauses in agreements with contractors in the midstream market . Traditionally , knock-for-knock clauses were more common in contracts relevant to the upstream market that related to onsite activities at the well or field . Before accepting such terms , along with the standard commercial practicalities of entering into risk sharing transaction agreements , such midstream contractors would need to consider if their insurance adequately covers their liability under a knock-for-knock regime .
On more complex multi-party projects a ‘ mutual hold harmless agreement ’ may be agreed between all the relevant project parties . This arrangement is similar to that described above in respect of bilateral services agreements , except that each of these project parties ( individually rather than as two distinct groups under the services agreements ) indemnifies all the other project parties on a knock-for-knock-basis . This is often a suitable arrangement where there are more than two parties with regular cross-over and interaction over the life of the project . Adopting this horizontal approach , rather than a more traditional vertical approach , with each party paying out under one contract and then seeking reimbursement under another , negates the risk of a party in the chain becoming insolvent , which may prevent recovery .
How are knock-for-knock clauses construed under English law ?
The starting point under English law is that knock-for-knock clauses are contractual clauses which must be interpreted in the same way as any other contractual clause .
The modern approach to contractual construction was explained in Arnold v Britton , emphasising that particular importance must be given to the express wording of the contract in question .
It is a ‘ unitary exercise [ which ] involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated ’.
A knock-for-knock clause will therefore be construed by identifying its natural and ordinary meaning by considering the express wording of the provision , the wider contractual context and the factual matrix .
References :
Transocean Drilling UK Ltd v Providence Resources plc [ 2016 ] EWCA Civ 372
Arnold v Britton [ 2015 ] UKSC 36 , at paras [ 15 ]–[ 23 ]
Wood v Capita Insurance Services Limited [ 2017 ] UKSC 24 at para [ 12 ]