Where the parties are sophisticated and of equal bargaining power and the contract has been ‘ negotiated and prepared with the assistance of skilled professionals ’, which will usually be the case with contracts in the offshore energy industry that include knock-for-knock provisions , the express wording of the clause may ( but will not always ) take on more importance than the context .
In addition , the following principles may apply to the interpretation of knock-for-knock clauses :
• a knock-for-knock clause will invariably result in a party contracting out of a liability it would otherwise have under the common law ( for example , a liability to pay damages in respect of loss resulting from its breach of contract ).
As a matter of English law , a party will be presumed not to have intended to abandon those common law rights and clear and express wording is required to rebut this presumption .
This means that , as with all exemption or exclusion clauses , clarity in the drafting is key . ‘ The more valuable the right , the clearer the language will need to be ’
• one of the key features of knock-for-knock clauses is that they will apply irrespective of fault or blame . The parties should consider at the drafting stage whether the effects of the clause should also apply in circumstances where one party has been negligent . Again , clear wording is required if the intention is to exclude liability for negligence . Where that is the intention of the parties ‘ negligence ’ should expressly be mentioned in each aspect of the knock-for-knock clause to which it applies .
Where it is expressly referred to in one part of the clause but is not referred to in another ‘ the disparity must be taken as intentional ’
• an exclusion clause that deprives the contract of any meaningful obligations will be unenforceable . If the knock-for-knock clause reduces the contract to no more than a declaration of intent , this principle will be applied and the scope of the clause reduced accordingly .
However , the principle should ‘ be seen as a last resort ’ and the courts have suggested that it may only apply ‘ in cases where the effect of the clause is to relieve one party from all liability for breach of any of the obligations which he has purported to undertake ’. Whether a knock-for-knock clause will have that effect will depend on the words used
• the ejusdem generis rule operates to limit the scope of general words which follow a list . Where , for example , a knock-for-knock clause lists a number of specific categories of loss in respect of which it applies and then states ‘ and any other loss ’, the scope of the catch-all language at the end may be limited by the listed categories of loss . Whether this argument is successful will depend on the facts
Whether the contra preferentem rule ( a rule providing that in cases of true ambiguity as to the effect of a contractual provision the term will be construed against the party that put them forward ) will apply to knock-for-knock clauses in offshore oil and gas contracts was considered by the Court of Appeal decision Transocean Drilling UK Ltd v Providence Resources Plc .
The Court of Appeal emphasised that the contra preferentem rule will not apply where there is no ambiguity ( because the words of the contract are clear ) and where the clause in question ‘ favours both parties equally , especially where they are of equal bargaining power ’. For more information on contract interpretation generally , see Practice Note : Contract interpretation — rules of contract interpretation .
References :
Wood v Capita Insurance Services Limited [ 2017 ] UKSC 24 at para [ 13 ]
References :
Gilbert-Ash ( Northern ) Ltd v Modern Engineering [ 1974 ] AC 689 at para [ 717 ]
Stocznia Gdynia SA v Gearbulk Holdings Ltd [ 2009 ] EWCA Civ 75
Canada Steamship Lines v The King [ 1952 ] AC 192
Colour Quest Ltd v Total Downstream UK plc [ 2009 ] All ER ( D ) 152 ( Apr )
Suisse Atlantique Société d ’ Armement Maritime SA v NV Rotterdamsche Kolen Centrale [ 1967 ] 1 AC 361
Transocean Drilling UK Ltd v Providence Resources plc [ 2016 ] EWCA Civ 372 at para [ 27 ]
References :
Transocean Drilling UK Ltd v Providence Resources Plc [ 2016 ] EWCA Civ 372
Transocean Drilling UK Ltd v Providence Resources Plc [ 2016 ] EWCA Civ 372 at para [ 20 ]
Gross negligence and wilful misconduct in the context of knock-for-knock clauses
Knock-for-knock clauses often make reference to ‘ gross negligence ’ and ‘ wilful misconduct ’. They are used as exceptions to the clause and result in certain behaviour being carved out from the mutual risk allocation regime . Care must be taken when using these terms .
English tort law does not recognise ‘ gross negligence ’ as distinct from simple negligence .
However , where the parties to a contract include ‘ gross negligence ’ as a term the courts will construe that term as they would any other contractual provision . Defining ‘ gross negligence ’ will provide clarity and will reduce the scope for dispute , which is the very purpose of the knock-for-knock clause . It is therefore common practice for such a definition to be negotiated .
References :
Camerata Property v Credit Suisse Securities ( Europe ) Ltd [ 2011 ] EWHC 479 ( Comm ) at paras [ 161 ]–[ 162 ]