Knock for Knock Clauses

A clause in letter of intent for proposed construction of an oil rig read as follows: "Shipyard and Buyer shall each maintain their own insurance based on the principle that the parties will insure their own people and equipment (except that the Builder's risk shall apply as set out in contract). Each party shall provide the appropriate documentation of its insurance to the other party."

Once negotiation for the contract proceed, this will form the basis for discussion and incorporation of a detailed indemnity provision, commonly referred to as a 'knock for knock' clause into the definitive contract. Such clauses are used particularly in the construction, shipbuilding and oil/gas industries to manage and allocate risk. Essentially, respective parties undertake responsibility for loss or damage to their own property or for injury or death to their own employees and identified parties (usually regardless of fault). Ironically it is also one of the least negotiated item, rendering them ineffective if certainty or clarity is lacking.

Does such indemnity provision cover losses due to negligence? In the case of Walters v. Whessoe Ltd and Shell Refining Co. Ltd [1], it was held that: “ ... indemnity will not lie in respect of loss due to a person’s own negligence or that of his servants unless adequate and clear words are used or unless the indemnity could have no reasonable meaning or application unless so applied…” per Sellers LJ

A three part test was enumerated by the Court in the case of Canada Steamship Lines Ltd v R, [2] namely: (1) where a clause expressly exempts a person in whose favor it is made from the consequence of the negligence of his own servants, then effect must be given to such a provision; (2) in the absence of any expressed reference to negligence the court will consider whether the words in their ordinary meaning are wide enough to cover the negligence of his own servants; and (3) where the words used are wide enough for the above purposes then the court must consider whether there is another head of damage on which to base the claim other than negligence.

In the case of EE Caledonia Ltd v. Orbit Valve Co PLC , [3] (arising from the unfortunate Pipe Alpha platform disaster in the North Sea), the plaintiffs, EE Caledonia Ltd had settled a claim for the death of of an employee of Orbit Valve and proceeded to claim reimbursement from Orbit under an indemnity clause. The Court of Appeal stated that "the prima facie implausibility of a party agreeing to release the other from liability for negligence or assuming liability for the consequence of the others negligence". The indemnity clause did not contain express provision that it would apply, even if the loss in question was caused by negligence. Consequently, EE Caledonia's claim failed as the death was caused by their own negligence.

On the question whether the relevant clause included an indemnity for breach of statutory duty as opposed to negligence, it was held that the clause should be construed as providing that the indemnities are not applicable if the event in question had been caused not only by a party's breach of statutory duty but also by his negligence. Thus, where a party wishes to avoid the consequences of its liability for negligence under an indemnity clause, the language expressed must be certain and clear.

[1] [1960] CA (Civil Division) 6 Build LR 23
[2] [1952] 1 Lloyd’s Rep 1 at p 8, col; [1952] AC 192 at p 208
[3] [1995] CA 1 All ER 174, [1994] 1 WLR 1515, [1994] 2 Lloyd’s Rep. 239.

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