UK: Another Victory for Knock-for-Knock Clauses

Last Updated: 29 July 2010
Article by Paul Dean and Jean Koh

Originall published in Lloyd's List, 29 June 2010

In the recent case of Farstad Supply AS v Enviroco Ltd and another (The Far Service) [2010] UKSC 18, when deciding whether the defendant was entitled to claim a contribution from a third party the Supreme Court had to consider the meaning and effect of a knock-for-knock provision commonly encountered in offshore contracts between the claimant and the third party.

This case concerned an oil rig supply vessel, Far Service, which was chartered by the claimant, Farstad Supply, on a long-term charter contract to Asco UK, the third party, for work in the oil rig supply industry.

While the vessel was in port, Asco instructed the defendant, service company Enviroco, to clean out some of the tanks on board the vessel.

On Asco's instructions, the master started the engines in preparation to shift to another berth. At the same time an employee of Enviroco inadvertently opened a valve releasing oil into the engine room near hot machinery which ignited and caused a fire, badly damaging the vessel.

Farstad brought a negligence action against Enviroco in Scotland. Enviroco denied liability and argued that both Farstad and Asco had materially contributed to the incident and were contributorily negligent. As such any award of damages should be apportioned between itself and Asco and that Asco should be ordered to make a contribution pursuant to s3(2) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1940 (the 1940 Act).

Farstad stated a preliminary plea, arguing that Asco could not be liable to Farstad because of clause 33.5 of the charterparty between Farstad and Asco. Therefore Enviroco would not be entitled to a contribution from Asco.

Clause 33.5 of the charterparty provided as follows:

"Subject to Clause 33.1, the Owner [Farstad] shall defend, indemnify and hold harmless the Charterer [Asco]... from and against any and all claims, demands, proceedings and causes of action resulting from loss or damage in relation to the vessel (including total loss) or property of the owners, including personal property of owner's personnel or of anyone for whom the owner may be responsible on the vessel, irrespective of the cause of loss or damage, including where such loss or damage is caused by, or contributed to, by the negligence of the charterers..."

At first instance, Lord Hodge held that Enviroco was not entitled to a contribution from Asco. This was reversed on appeal and Farstad appealed to the Supreme Court.

In coming to their decision as to whether Asco, if sued by Farstad, would have been held liable for damages, for the purposes of s3(2)of the 1940 Act, it was necessary for their Lordships to consider the meaning and ambit of Clause 33.5 of the charterparty.

It was held that this clause did operate to exclude Asco's liability to Farstad in respect of damage to the vessel. This, according to Lord Clarke, was the natural meaning of the expression that the owner must "defend... and hold harmless" the charterer, not only against liabilities and causes of action, but also against "all claims, demands" and "proceedings" in respect of loss or damage in relation to the vessel. Importantly, his Lordship also confirmed that the exclusion applied even if the damage was caused by Asco's negligence. As Enviroco could not establish that, if sued, Asco would have been liable to Farstad, which they needed to establish under s3(2) of the 1940 Act, it followed that Enviroco was not entitled to a contribution from Asco.

Clause 33.5 is a typical provision in the knock-for-knock liability regime commonly adopted in offshore contracts and charterparties for supply vessels. Lord Clarke commented that clause 33 as a whole (which is the knock-for-knock clause in that charterparty) represents a "carefully considered balance between the interests of an owner on the one hand and those of the charterer on the other".

This comment, and indeed this decision, follows the lead of one of the first English High Court cases involving the knock-for-knock provisions - Smit v Mobius [2001] CLC 1545, where the court held that an exclusion clause within the knock-for-knock regime applied even if the vessel belonging to the party relying on the exception was unseaworthy.

It is clear that the courts are keen to preserve the certainty of the meaning and ambit of such clauses and to give effect to the express intentions of the parties to a contract, which then allows parties to insure their risks more effectively.

Not only is this a welcome addition to a growing list of case law (the latest of which were discussed in the article 'Cases tighten the scope of knock-for-knock provisions' in Lloyds List, February 18, 2009), which reinforces the court's endorsement and protection of the knock-for-knock regime, but it is also a good illustration of the effectiveness of such clauses even against third parties who are not party to the knock-for-knock regime.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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