Safety is a top priority for the oil&gas industry and, thankfully, accidents are rare. When they do happen, the sector has a particular way of deciding who should bear the costs.
Individuals who have been injured will always be compensated – usually initially by their employer. The question is whether the employer can pass on that cost, or the costs of damaged property, to another party.
In most industries, the company that causes an accident would be sued for this damage, although if it had a contract with the damaged party, that contract might contain caps on damages or exclusions of certain types of damage. The oil industry has a different system of risk allocation. In effect, a contractor providing services offshore agrees to take the risk of damage to its people and property, so if an accident occurs which is caused by the operator or its group, the contractor agrees to bear the resulting losses and not to sue the operator.
In return, the operator agrees that if an accident is caused by the contractor or its group, it will not sue the contractor.
This “mutual hold harmless” system sounds illogical – why would you agree not to sue someone who had caused you damage? However, there are a number of sound commercial reasons for this approach. It means that each party insures against injury or damage to its own people and property, the value of which it knows best.
Smaller contractors who could not afford the risks of working offshore if they might be held responsible for accidents to expensive platforms and equipment are able to compete for the business of operators.
It means contractors do not have to have the levels of insurance that they would otherwise need, and therefore keeps costs down. It also reduces litigation by creating a clear system of risk allocation that reduces costs for the industry.
However, while this is the theory, when an accident happens, as you might expect, companies, and particularly their insurers, will look very closely at the precise wording of these “indemnity clauses” in their contracts to see exactly what their obligations are and whether there are any arguments for passing liability to another party.
Litigation on indemnity clauses is not common, but some recent cases provide useful insights into some thorny issues. In this short article, we can only comment generally on the twists and turns and illustrate the complexities.
One thing the cases have taught us in relation to indemnity clauses is that if it is intended that an indemnity clause should apply even when the accident resulted from the indemnified party’s own negligence (and, indeed, breach of duty), the clause should make this clear.
Words such as “all claims whatsoever” or “all claims however caused” may not be sufficient for this purpose – the clause must specifically refer to negligence (as most oil&gas indemnity clauses do). This point has been reinforced recently, albeit not in the oil&gas context, in the English Court of Appeal decision in Jose v MacSalvors Plant Hire Ltd and another.
NET TV v MARHedge: this case does not involve the oil&gas industry. However, it raises an interesting question as to whether an indemnity clause that says it applies even in the case of negligence will also apply to cases of deliberate misconduct by the indemnified party.
Sometimes, indemnity clauses will specifically exclude “wilful misconduct” so that, in these cases, a party may be sued for all the consequences of its actions. However, other clauses may have no express exclusion, and views differ as to whether the courts would allow a party, or not, to be indemnified where it had deliberately caused the loss.
The express wording of the clause in each circumstance is critical. There are no cases specifically on this question in the context of mutual hold harmless indemnities in oil&gas contracts, but a recent case shows how the courts may look at this issue.
In this case, concerning a contract for a joint venture between NET TV and MARHedge, there was no dispute that MARHedge had deliberately walked away from its contractual obligations – the only question was whether an exclusion of consequential loss applied to protect MARHedge from NET TV’s claims.
The court held that, while there was no rule of law that prevented an exemption clause applying to such a fundamental breach of contract, as a matter of construction, there was a strong presumption that such a clause was not intended to apply to a deliberate repudiatory breach.
Strong terms would be needed to rebut that presumption. Moreover, the purpose of exclusion clauses between commercial parties was to allocate insurable risk and so they should not normally be construed to cover an uninsurable risk such as deliberate wrongdoing by the wrongdoer (or the controlling mind of a corporate entity), as opposed to vicarious liability for the acts of employees.
There was, therefore, a particular need to use clear language where the exemption clause was intended to cover wrongdoing which cannot, or is unlikely, to be controllable by insurance.
This case may provide some reassurance for the oil&gas industry that, in the vast majority of cases, indemnity clauses will apply as they are written, and will apply even in the case of wilful misconduct where that is not expressly carved out.
There may be an exception where the wrongdoing is by the “controlling mind” of a company, at least in certain cases. In the particular circumstances of this case, where there was a clear decision by the managing director of MARHedge to walk away from the contract, the court held that the particular exclusion clause did not apply.
This is consistent with a comment by a judge in an earlier case concerning the rig delightfully named the A Turtle, in which the judge commented that an exclusion or indemnity provision may not release a party from liability if that party had so radically breached the contract that it had failed to do anything at all in the performance of its obligations.
Precisely how far this principle goes and how far the concept of a controlling mind extends is something which will no doubt be the subject of further litigation in years to come. However, at least where an accident results from the act or omission of an individual employee offshore, or even a middle manager, for which the employer would normally be liable, then this is unlikely to be viewed as the wrongdoing of the controlling mind of the company.
Penelope Warne is a partner and head of energy at international law firm CMS Cameron McKenna
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