Caution is needed when agreeing provisions that amend the knock-for-knock position
4th January 2018
There is one good reason why there are many more solicitors dealing with marine claims than in the offshore and energy sectors. In traditional shipping, the parties are frequently in dog-fights over damage to cargo, demurrage, unpaid or disputed hire, general average and, of course, the occasional unexpected bump, towage or salvage.
Conversely, offshore and energy related contracts contain liability and indemnity provisions (commonly known as ‘knock-for-knock’ clauses) which provide broadly that the losses lie where they fall, irrespective of fault, along with provisions that protect against lawsuits from, or against, related parties (often referred to as ‘owners’ or ‘charterers’ group’). With operators often working in the same oilfield controlled by a government or oil major utilising high value assets, this not only brought down the cost of insurance, in particular liability insurance, but also reduced substantially the scope for litigation. The English courts have upheld these contractual protections as expedient.
These provisions were gradually adopted by BIMCO and are found variously in HEAVYCON, SUPPLYTIME, TOWCON and TOWHIRE.
Recently, however, there has been an alarming trend for the buyer or end-user to take advantage of the prolonged soft market, and amend the knock-for- knock regime to throw risk onto the shipowner.-16
Some of the provisions now seen in the offshore support vessel and heavylift sectors create potentially very serious issues that are frequently not well- considered. For example, you might find a standard SUPPLYTIME 2005 with an un-amended clause 14 supplemented by an additional clause, providing that despite the knock-for-knock provisions, the owners shall be liable for a sizeable first tranche of any loss suffered by the property or personnel of charterers’ group for each and every incident. If that figure is, say, USD 250,000, it may well be intended to reflect charterers’ group’s own insurance deductible. So, charterers will now bring claims for breach of contract or negligence in circumstances where the duty of care is not well defined, simply because it has, until now, not been necessary to do so because of the existence of knock-for-knock provisions. Contrast this with the generally balanced provisions under the Hague Visby Rules for the carriage of cargo, or not dissimilar seaworthiness provisions found in charterparties.
Ordinary vs gross negligence
Another example is the imposition of terms that override the knock-for-knock provisions in the event of gross negligence. The concept of gross negligence is a concept expressly recognised in Scandinavia. A Norwegian lawyer explained how it differed from ordinary negligence as follows: “The difference is that when you encounter ordinary negligence, you nod your head as you recognise a fellow human being’s mistake; however, when confronted with gross negligence, you simply shake your head in disbelief”.
However, English law has been reticent to endorse a distinction between ordinary and gross negligence, so the existence of such a provision in a contract subject to London arbitration or litigation in the High Court, will create a challenge for the parties’ advisors and the competent tribunal.
Under the standard provisions, a party is to be protected from claims arising from its acts, neglect or default. In the same way that a provision might be made for gross negligence, there is a temptation for parties to seek expressly to deprive the party of protection in the event of its wilful or criminal misconduct. Some may find this logical, but it overlooks the fact that as a matter of English law, such conduct would deprive the party of protection in any event. Further, an express clause depriving the owner of protection for criminal misconduct could be rather dangerous when one reflects upon the alacrity with which coastal authorities will nowadays prosecute seafarers involved in what most of us would regard as ordinary marine accidents.
Litigation time bomb
Another example of an amended standard form involved the deletion of not just part of but the entire pollution liability clause from HEAVYCON, the provisions of which are intended to ensure that each party is responsible for and insures against the risk of pollution from its vessels only (this supported by the usual cross-indemnity undertakings). The standard clauses reflect the position under the oil and bunker spill conventions, where liability is channelled towards the registered owner and away from third parties. It makes very little sense to oblige the parties to insure not only their own liabilities in this respect, but also that of each other, whilst prejudicing their P&I cover in the process.
As one offshore operator remarked, such provisions, tinkering with the standard form wordings, are a litigation time-bomb waiting to go off.
Finally, it should not be overlooked that P&I clubs may exclude cover where members have entered into contracts containing ‘unusually burdensome terms’ without the club’s prior approval.
Originally published in Triton 2017 no 3, The Swedish Club