Simon Shaddick - Holman Fenwick Willan - Liability and Indemnity in OSV contracting

LIABILITIES & INDEMNITIES IN

OSV CONTRACTING

Simon Shaddick

Holman Fenwick Willan

[email protected]

Offshore Support Vessels

Perth, 23 June 2015

Liabilities & indemnities in OSV contracting

Risk allocation in a changing OSV market – "knock-for-knock"?

Owners, Charterers, and extension to other project parties

Debunking the myths around "consequential" loss exclusions

Pollution liabilities and indemnities – a slippery slope?

RISK

Personal injury or

death (e.g. crew)

Physical loss or

damage (e.g. to

vessel, installation)

need to allocate this risk between offshore project participants

the Stateshipowners

charterers

buyers &

sellers of end

product

owners &

operators of the

offshore installation

insurance

markets

master &

crew

Environmental

(e.g. oil pollution)

Risk allocation in offshore contracting

other contractors &

service providers

involved in project

Liabilities to "external"

third partiesEconomic and

"consequential"

losses?

financiers & investors

RISK

Personal injury or

death (e.g. crew)

Physical loss or

damage (e.g. to

vessel, installation)

need to allocate this risk between offshore project participants

shipowners

charterers

Environmental

(e.g. oil pollution)

Liability & indemnity provisions in

OSV charter allocate these risks

between Owners and Charterers

Liabilities to "external"

third partiesEconomic and

"consequential"

losses?

Risk allocation in offshore contracting

"Knock-for-knock" liability & indemnity regime is traditional

means of allocating risk for certain losses in OSV charters

"No fault" liability regime: Each party bears its own loss, even if

the other party has caused/contributed to that loss

In a "true" knock-for-knock regime, each party is responsible for:

Loss/damage to its own property

Injury/death of its own personnel

Pollution from its own property

Its own consequential/economic losses

Losses lie where they fall – clarity/certainty in risk management,

each party protects its own position through insurance

Risk allocation in OSV contracts - "knock-for-knock"?

Owner's knock-for-knock protection:

Notwithstanding anything else contained in this Contract, the Owner shall not

be responsible for any loss or damage to the Charterer's property, or for any

death or personal injury of any employee of the Charterer, even if such loss,

damage, death or injury is caused wholly or partially by the act, neglect

or default of the Owner, and the Charterer shall indemnify, defend and hold

harmless the Owner against all claims, costs, actions and liabilities arising out

of or in connection with any such loss, damage, death or injury.

Charterer's knock-for-knock protection:

Notwithstanding anything else contained in this Contract, the Charterer shall

not be responsible for any loss or damage to the Owner's property, or for any

death or personal injury of any employee of the Owner, even if such loss,

damage, death or injury is caused wholly or partially by the act, neglect

or default of the Charterer, and the Owner shall indemnify, defend and hold

harmless the Charterer against all claims, costs, actions and liabilities arising

out of or in connection with any such loss, damage, death or injury.

Knock-for-knock clauses: a "true" example

Rationale: Operations in the offshore energy sector can be:

high value e.g. Prelude FLNG

high risk e.g. West Atlas, DWH

complex operationally and contractually

Risk allocation in OSV contracts - "knock-for-knock"?

Rationale: If a purely "fault-based" liability regime were applied

in the offshore contracting scenario:

High levels of risk would be allocated to certain parties (e.g. OSV

owners, other contractors) commercially incapable of bearing that risk

Insurance for certain risks may become prohibitively expensive (or even

impossible) for those parties to obtain

The same risks may have to be insured against by multiple parties,

adding to overall project costs

Resolution of claims and litigation would be more time-consuming,

complex and expensive

As a result of the above, participation in the offshore sector may be

restricted to all but the very largest and most well-resourced players,

thus reducing overall industry competitiveness and efficiencies

Risk allocation in OSV contracts - "knock-for-knock"?

"A Turtle" semi-submersible rig towed by the "Mighty Deliverer", from

Brazil to Singapore via COGH in 2006 – TOWCON contract, English law

"Mighty Deliverer" ran out of fuel in the South Atlantic and released her tow

"A Turtle" ran aground, salvage attempts failed, rig declared CTL

Rig owners sued tug owners based on failure to take on sufficient bunkers

Knock-for-knock example: The "A TURTLE"

The English High Court agreed that the tug owners were clearly in

breach of their obligations under the TOWCON contract, by failing to

take on sufficient bunkers at the commencement of towage

However, the knock-for-knock clause in TOWCON protected the tug

owners from liability for their breach:

"The following shall be for the sole account of the Hirer whether or

not due to breach of contract, negligence or any fault on the part of

the Tugowner, his servants or agents: (i) Loss or damage of

whatsoever nature, howsoever caused to or sustained by the Tow."

Losses lay where they fell, regardless of the tug's breach/fault

Was this outcome fair or reasonable?

Should a "guilty" party be protected in this way?

Does this encourage negligent - or even reckless - behaviour?

Knock-for-knock example: The "A TURTLE"

Significant changes in market supply/demand fundamentals;

widespread slowdown in OSV chartering activity

Risk allocation more likely to be a negotiated outcome in each

case; Charterers now generally in a stronger bargaining position

Liability & indemnity provisions in many OSV charters moving away

from knock-for-knock, towards a more "fault-focused" risk allocation

Exceptions for wilful misconduct, gross negligence, even negligence

Certain types of loss/damage excluded from knock-for-knock regime

Replace with a fault-based regime, coupled with $ liability caps

Liability & indemnity regimes now vary significantly from charter to

charter; no standard risk allocation; BIMCO forms heavily amended

Risk allocation in a changing OSV market

Liability & indemnity provisions usually allocate risk not just

for Owners' and Charterers' loss, but for loss suffered by:

Owners and Charterers indemnify each other against claims

by other members of their "Group", which are not directly bound

Extension to other project parties

Owners' Group

E.g: OwnersTheir contractors

Their subcontractorsAll of their employees

Charterers' Group

E.g: CharterersTheir contractors

Their subcontractorsAll of their employees

Important for Owners and Charterers to consider the scope of the

"Group" definitions in each charter, and whether this gives them

sufficient protection – depends on nature/structure of each project

Potential scope of Charterers' Group can vary significantly

between projects/workscopes – might also include the Charterers'

Related companies

JV / project partners

Customers / clients

Contractors of the above

Employees of the above

Extension to other project parties

Oil Company

Vessel Owners

OSV charterparty

Charterers' Group

Charterers

Rig Owners

Owners

Drilling Contract

Charterers'Contractor

Extension to other project parties

But Charterers are not always the "end user" of Vessel's services

Vessels often provide services to Charterers' customers/clients,

Owners may be exposed to claims from those parties

Owners can seek protection by negotiating to include customers

within the Charterers' Group definition (as in SUPPLYTIME 2005)

Oil Company

Vessel Owners

Marine Services

Contractor Parties should consider

whether the "Group"

definitions are appropriate

for the project in question,

and negotiate for

amendments if necessary

Mutual hold harmless?

Services Contract

OSV charterparty

Charterers'Group

Charterers'Customer

Rig Owners

Owners

Drilling Contract

Not Charterers'Customer

Charterers

Extension to other project parties

"Neither party shall be liable to the other for any

consequential losses including loss of use, loss of

production, loss of profits, or loss of business opportunity"

1. What kinds of losses is this intended to exclude?

2. What kinds of losses does this actually exclude?

Exclusion of "consequential" loss

"Consequential loss" is given a very specific, narrow meaning:

Loss that is not "direct", but is nevertheless within the

reasonable contemplation of the parties at the time of

contracting as the probable consequence of a breach

Loss of use, loss of profits etc. can be direct or consequential

If clause refers to "consequential losses including loss of use,

loss of profits etc" (e.g. SUPPLYTIME2005), it is probably only

effective to exclude the consequential part of those losses

Direct loss of use, loss of profits etc – which may be very

significant – is most likely not excluded by the clause

Is this what the parties would have intended?

Exclusion of "consequential" loss – English law

High Court in Darlington Futures v Delco Australia (1986)

Give exclusion clauses "natural and ordinary meaning, read in light

of the contract as a whole, giving due weight to the context in which

the clause appears including the nature and object of the contract"

Focus on the plain meaning and overall commercial context of

the clause, rather than narrow, legal concepts of "consequential

loss": Environmental Systems v Peerless (VCA, 2008)

If clause refers to "consequential losses including loss of use, loss

of profits etc" it is probably effective to exclude all loss of use,

loss of profits - regardless of whether "direct" or "consequential"

Still possible to argue the English approach in some cases…

Exclusion of "consequential" loss – Australian law

How can parties exclude liability for any loss of use, loss of

profits etc, regardless of whether "direct" or "consequential"?

"Neither Owners nor Charterers shall be liable for…

(i) any loss of profit, loss of use or loss of production whatsoever and

whether arising directly or indirectly from the performance or

non-performance of this Charter Party, and whether or not the same

is due to negligence or any other fault on the part of either party;

(ii) any consequential loss or damage for any reason whatsoever,

whether or not the same is due to any breach of contract,

negligence or any other fault on the part of either party."

Need to consider including party "Groups", plus an indemnity

Exclusion of "consequential" loss

Pollution liabilities & indemnities

How can OSV contracts allocate risk between Owners

and Charterers for loss arising from pollution damage?

Traditional approach

to allocation of

pollution risk in

offshore contracts:

"no fault" basis

Depended only on

source of pollution

Owners: Above the

surface (i.e. from

the hull of the rig)

Charterers: Below

the surface

Insurance-focused

Pollution liabilities & indemnities

Pollution risk in

OSV charters can

also be allocated on

a "no fault" basis

Can depend only on

source of pollution

Owners: From the

Vessel (or other

Owners' Group

property)

Charterers: From

Charterers' Group

property

But in practice…

Pollution liabilities & indemnities

Pollution liabilities & indemnities

Owners responsible for Charterers responsible for

Pollution damage arising from acts or omissions of the Owners/their personnel which cause discharge, spills or leaks from the Vessel, except from cargo in/on the Vessel

"Any other" pollution damage, even where caused by the act, neglect or default of Owners (not limited to pollution from Charterers' Group property!)

Pollution damage arising from acts or omissions of the Owners/their personnel which cause discharge, spills or leaks from the Vessel, except from cargo in/on the Vessel

Pollution damage emanating from anything towed by the Vessel, from cargo in/on the Vessel or her tow, and from the property of any member of Charterers' Group

Pollution damage emanating from any Owners' Group property

Pollution damage emanating from any Charterers' Group property

Any pollution damage arising in connection with the Charterparty

n/a

Risk allocation in a

changing OSV market

"knock-for-knock"?

Owners, Charterers,

and extension to

other project parties

Exclusion of

"consequential" loss

Pollution liabilities

and indemnities

Liabilities & indemnities in OSV contracting

Lawyers for international commerce

hfw.com

Simon Shaddick

Holman Fenwick Willan

[email protected]