December 2014
Even though the “knock for knock” liability regime is a common feature on both the Norwegian and U.K. continental shelves, the implementation of the regime is approached differently on the two sides of the North Sea.
The “knock for knock” principle is a contractual regulation of liability where each party assumes responsibility for the personal injury/death and property damage of its own personnel and property, as well as a defined group of other parties, typically affiliates and subcontractors. This applies irrespective of cause and even if such loss or damage is attributable to the act or omission by the other contracting party. This liability regime is very common in the offshore industry as such allocation of responsibility and risk is necessary to reduce the need for dual
insurance for the same risks, and to avoid disputes between the contractual parties.
IMPLEMENTATION IN NORWAY AND THE UNITED KINGDOM
In the Norwegian sector the general approach has been to implement the “knock for knock” regime in contracts between oil companies and contractors with a wide definition of the respective co-ventures, affiliates and subcontractors for which they are responsible, thereby requiring each of the contractual parties to implement a similar “knock for knock” regime
in the con-tracts with their subcontractors, prefer-ably on back-to-back terms (back-to-back implementation).
In the UK sector whilst back-to-back implementation is not uncommon the industry has also sought to resolve the risk allocation between contractors working in offshore projects by establishing multiparty mutual hold harmless deeds (mutual hold harmless implementation). Under this regime, the contracts between the oil companies and contractors still implement
a “knock for knock” principle between the two contractual parties, but with a more limited group of other persons for which they are responsible. However, the relationship between two contractors having different contracts with the same oil company will still be governed by a “knock for knock” regime implemented in a mutual hold harmless deed to which both contractors are parties.
The industry in the UK has developed the “2012 Mutual Indemnity and Hold Harmless Deed” providing a standardised liability scheme for all operations in the UK’s territory of the North Sea and the Irish Sea1. The list of contracting parties is public and it is possible for new contractors to sign up to the scheme under a “deed of adherence”. There are also examples of oil companies having their own standard deeds.
BENEFITS AND PITFALLS
We have seen examples of oil companies familiar with a mutual hold harmless implementation from the UK continental shelf, wanting to follow the same structure when operating in the Norwegian Sector. Oil companies familiar with a mutual hold harmless implementation may also wish to introduce this regime in other sectors worldwide. Such an approach will however need to
be given due consideration by the con-tractors involved.
Although the “2012 Mutual Indemnity and Hold Harmless Deed” has had a successful application in the UK sector of the North Sea, there are certain challenges with a mutual hold harmless implementation as compared to a back-to-back implementation. These challenges could magnify where a mutual hold harmless implementation approach is introduced in sectors where there is no general regime with a publicly available list of the participants (such as
on the Norwegian side of the North Sea). In such situations application of the scheme is dependent on the relevant oil company ensuring that all of its contractors adhere to the regime, and even then it can be difficult for a specific contractor to check whether all of the other contractors have in fact entered such a scheme.
A distinct benefit of mutual hold harmless implementation is the direct contractual exclusion of liability it provides for the specified losses in favour of all parties to the deed. However, if the
relevant provisions are sufficiently well drafted back-to-back implementation should also achieve the same result, although perhaps not in such a straight-forward manner. This is because any claim by one contractor against another contractor for claims covered under the knock for knock principle is likely to be circular. For example, if contractor A claims against contractor B for a prop-erty loss suffered due to the negligence of contractor B, and contractor B is held liable for such loss, contractor B will have a recourse claim under the indemnity provisions of the
service contract it has with the oil company (assuming the definition of “company group” in the service contract covers such other con-tractors). In turn the oil company will have a recourse
claim against contractor A under the indemnity provisions under its service contract with contractor A. This “backwash” of liability is in practice likely to prevent contractor A from making a claim in the first place.
As mentioned above the mutual hold harmless implementation is likely to cover a more limited
“group” of other persons for which the contractual par-ties are responsible. Here this “group” will often only cover the relevant party, its affiliates and their employees (and not co-venturers or subcontractors as you would expect to see in a back-to-back implementation). Consequently it is important for a contractor to have confidence that all other relevant con-tractors have adhered
to the mutual hold harmless deed. As otherwise a con-tractor who has not adhered to the deed may be able to present a claim against another contractor who may not, given the limited “group”, be able to claim indemnification under its service con-tract with the oil company. A contractor will also take more of a risk on the financial strength of the other contractors involved in a mutual
hold harmless implementation as it will have to rely on each of the other contractors being able to honour its indemnity obligations.
Contractors should seek to limit these risks by ensuring that under its service contract the oil company is obliged to indemnify the contractor from any losses suffered as a result of the oil
company’s other contractors not adhering to the mutual hold harmless deed and/or who are not able to honour their obligations thereunder. However a contractor’s success in achieving this result will to a large extent depend on the strength of its negotiating position with the oil company.
Further to the above, in situations where the back-to-back implementation and mutual hold harmless implementation are combined there may also be challenges in determining if a specific contract or the mutual hold harmless deed shall prevail in respect of a particular loss.
For contractors operating in both the Norwegian and UK sectors of the North Sea, it is important to note these differences in approach in the implementation of the “knock for knock” liability regime. Careful drafting of liability provisions will as always be required, but different mechanics and pitfalls in implementation may require particular attention to ensure that the parties get the best (and not the worst) of both worlds.