Document 45558

Platform supply vessels battle the blazing remnants of the offshore oil rig Deepwater Horizon (Image credit: US Coast Guard)
Chidi Egbochue
Herbert Smith
Freehills, London
Reviewing ‘knock for knock’
indemnities following the
Macondo Well blowout
In the oil and gas world, contractual ‘knock for knock’ indemnities
(otherwise known as ‘mutual hold harmless’ or ‘bury your own dead’
indemnities) seem to be a way of life. However, recent oil rig disasters have
brought them sharply into focus.
The Piper Alpha, Montara and
Macondo oil rig disasters
Piper Alpha
It is just over 24 years since the Piper Alpha
disaster shocked the world. On 6 July 1988, the
Piper Alpha oil platform was operating in the
North Sea, 120 miles off the north east coast
of Scotland with 229 people on board when
an explosion occurred. The explosion and the
resulting fires claimed the lives of 167 people,
with all the survivors suffering injuries. Most
of the dead and the survivors were employed
by contractors, against whom the operator
brought claims for indemnity in respect of
payments it made to settle the resulting death
and personal injury claims. The disaster led to
an insurance loss of US$1.4bn.1 Piper Alpha
remains the world’s most catastrophic oil rig
disaster in terms of fatalities.
In the last few years, there have been two
oil pollution environmental catastrophes.
On 21 August 2009, an uncontrolled release of
oil and gas (ie, a blowout) from the Montara
Wellhead platform operating 250km off the
north west coast of Australia resulted in oil
and gas spilling into the Timor Sea for almost
11 weeks at a rate of 400 barrels (64 tonnes) a
day (but the initial discharge may have been
as much as 1,000 to 1,500 barrels a day). The
area affected by the spill was around 90,000
square kilometres.2 The operator was fined
AU$510,0003 and is also facing a US$2.4bn
compensation claim from the Indonesian
government.4 Montara was Australia’s worst
petroleum industry disaster.
‘A central cause of the
Macondo Well blowout
was found to be the failure
of a cement barrier in the
production casing string’
Just eight months after the Montara disaster,
the ‘worst environmental disaster America
has ever faced’5 occurred. On 20 April 2010,
a blowout from the Macondo exploratory well
in the northern Gulf of Mexico, off the coast
of Louisiana, triggered a number of explosions
and a huge fire which raged unabated for
two days. The well was being drilled by the
Deepwater Horizon drilling vessel, which was
abandoned shortly after the fire started. Of
the 126 people on board the vessel, 11 were
killed and 17 others were injured. The vessel
sank 36 hours after the fire started. The riser
and the drill pipe inside it bent and broke off
at the top of the subsea blowout preventer,
spewing gas and oil into the sea.6 Over the
next 87 days, almost five million barrels of oil
were discharged from the well into the Gulf
of Mexico. The US government responded
by imposing a six month moratorium on all
deepwater offshore drilling on the Outer
Continental Shelf, and introducing stringent
new regulations.7
A central cause of the Macondo Well
blowout was found to be the failure of a
cement barrier in the production casing
string. This allowed hydrocarbons to flow
up the wellbore through the riser and onto
the rig.8
The Deepwater Horizon was owned by
Transocean and leased to BP, as the operator
on behalf of itself and its joint venture
partners, Anadarko and Mitsui (through its
subsidiary MOEX); their respective shares in
the Macondo Prospect were 65 per cent,
25 per cent and 10 per cent. Halliburton was
BP’s cement contractor (through its subsidiary
Sperry Sun) and the Deepwater Horizon’s
blowout preventer was designed by Cameron.9
In the two weeks following the explosions,
70 lawsuits were filed by commercial
fishermen, property owners, area businesses,
municipalities, seafood processors and
recreational users against BP, Transocean,
Halliburton and Cameron.10 Following an
extensive investigation, US regulators issued
environmental and safety violation notices to
BP launched multi-billion dollar suits against
Transocean, Halliburton and Cameron.12
Recently, BP agreed a US$7.8bn deal to settle
100,000 claims by individuals and businesses,
covering economic, property and medical
claims,13 and it has been reported that the
US Department of Justice is nearing
settlements with BP and Transocean that
could involve civil fines ranging from US$5bn
to US$21bn, and criminal fines of up to
A common feature of the litigation that
ensued from the Piper Alpha and the
Macondo disasters was the reliance placed by
the operator (in the case of Piper Alpha) and
by the vessel owner and contractors (in the
case of Macondo) on knock for knock
indemnities (‘KK Indemnities’) to limit their
financial exposure to third parties’ claims for
negligence and breach of statutory duty, and
to statutory fines and penalties.
What are knock for knock indemnities?
The basic form of a knock for knock
In the oil and gas sector, a KK Indemnity in its
most basic form provides that party A (eg, an
operator) indemnifies party B (eg, a drilling
contractor) against claims in respect of any:
• death of, or personal injury to, party A’s
• loss of, or damage to, party A’s property (but,
with regard to KK indemnities given under
construction contracts, excluding loss of, or
damage to, the works being constructed);
• pollution emanating from party A’s property.
The above are all notwithstanding that
party B’s negligence or breach (whether of
contract or of statutory duty) may have
caused or contributed to the death, personal
injury, loss, damage or pollution in question.
In return, party B provides a reciprocal
indemnity in favour of party A.
‘KK Indemnities should be expressly carved out
from any cap on the indemnitor’s aggregate
liability and from any exclusion of its liability
for “consequential loss”’
Extension of benefit of knock for knock
indemnity to party’s group
A knock for knock indemnity will usually also
cover a party’s ‘group’, which may include a
party’s affiliates, contractors, subcontractors
and its and their respective officers, employees
and agents. In many jurisdictions, the
members of the group may have express rights
to enforce such indemnities despite not being
parties to the contract.15
Recovery of legal costs under knock for
knock indemnities
It is commonplace for KK Indemnities
expressly to provide for recover y of the
indemnitee’s reasonable legal costs or
attorney fees. However, in Case 2:10-md-02179CJB-SS Document 5446 Filed 01/26/12 (BP/
Transocean), which was a case arising out of the
Macondo disaster, a Louisiana District Court
construed such a provision as not covering
Transocean’s legal costs of establishing a right
to indemnification.
Aggregate liability cap and consequential
loss exclusion carve-outs
KK Indemnities should be expressly carved out
from any cap on the indemnitor’s aggregate
liability and from any exclusion of its liability for
‘consequential loss’ (as defined in the relevant
contract) to forestall arguments as to whether
or not the indemnities were intended to
provide full coverage for the claims in question.
This is exemplified by the consequential loss
and aggregate liability cap arguments which
were raised, albeit unsuccessfully, in Caledonia
North Sea Ltd v London Bridge Engineering Ltd
[2002] UKHL 4, known as the London Bridge
case (which was a House of Lords’ Scottish
case relating to the Piper Alpha disaster), and
Westerngeco Ltd v ATP Oil & Gas (UK) Ltd [2006]
EWHC 1164 (COM), respectively.
The interplay between knock for knock
indemnities and insurance
Any obligation of the indemnitor to insure
against the risk under a KK Indemnity is
likely to be construed as being independent
from the indemnity itself, although this
is often expressly stated in contracts.
Insurance policies may not cover gross
negligence or wilful misconduct, or civil
or criminal fines or penalties. Where the
indemnitee, notwithstanding that it has the
benefit of a KK Indemnity, effects insurance
to cover the risk, the indemnitor will still
have primary liability and the insurer will
have only secondar y liability and will be
subrogated to the rights of the indemnitee
(this is the position under English law – see
the London Bridge case – but not necessarily
other jurisdictions).
The justification for knock for knock
KK Indemnities are a particular feature of
the oil and gas industry. The alternatives
are ‘guilty party pays’ (ie, fault based)
indemnities or staying silent in the contract
(in which case applicable law – that is,
statutor y duties and, under English law,
the law of negligence – will determine
liability). However, these alternatives may
be impractical in view of the complexity and
delay (both to the resolution of claims and
to production; for example, rig downtime
due to in situ investigations) involved in
establishing cause and attributing fault
where hazardous operations and numerous
interfacing parties are involved and the
substantial financial risks that the supply
chain would be exposed to. Furthermore,
contractors and subcontractors would have
to insure against those risks, which would
give rise to multiple overlapping layers of
insurance and high insurance premiums
that would be passed on ultimately to the
operator. Under a KK Indemnity regime,
each party is only required to insure against
the death of, or personal injury to, its own
employees (which insurance is mandatory
for employers in many jurisdictions in any
case) and loss of or damage to, and pollution
emanating from, its own property.
Indemnities in respect of liability to
third parties
With respect to third parties (excluding third
parties that are defined as being part of either
party’s group), it is common for oil and gas
service contracts to provide for ‘guilty party
pays’ reciprocal indemnities. This means that
party A indemnifies party B and party B’s
group against claims in respect of any:
• death of, or personal injury to, third parties;
• loss of or damage to the property of third
parties (excluding pollution damage, which
will be addressed in the KK Indemnities).
Again, the above are to the extent caused by the
negligence, breach of statutory duty or breach
of contract of party A or its group. Conversely,
Party B provides a reciprocal indemnity in
favour of party A and party A’s group.
Alternatively, contractors may give an
indemnity in respect of third parties’ claims
arising out of the contractor’s operations
except to the extent caused by any
negligence, breach of statutory duty or
breach of contract by the operator or any
member of its group. This puts the onus on
the contractor to prove such negligence or
breach and therefore fills a gap where it is
difficult to prove which party (if any) caused
the death, personal injury, loss or damage
in question.
Are knock for knock indemnities
There are only a few instances where KK
Indemnities have been considered by the
courts. In the London Bridge case, Lord
Bingham referred to a KK Indemnity that
covered employees as a ‘market practice [that]
has developed to take account of the peculiar
features of offshore operations’. It was held
that the KK Indemnity, properly construed,
entitled the operator to indemnity from the
contractors even where they were not liable at
common law, or liable for breach of statutory
duty, in respect of the fatalities and injuries.
However, there was no discussion in the
London Bridge case of the Unfair Contract
Terms Act 1977 (‘UCTA’) which applies to
UK jurisdictions and which provides that a
party cannot exclude or restrict its liability
‘Certain jurisdictions may have public
policy objections to certain aspects of
KK Indemnities’
for death or personal injury caused by
negligence and which can only exclude or
restrict its liability for any other loss or
damage if the relevant contract term or
notice is reasonable. It is noted that UCTA
does not apply to contracts where the
governing law of the contract would not be
English law (or another UK jurisdiction)
but for the choice of law made by the parties.
However, even where contracts come within
the scope of UCTA, it can be argued that
KK Indemnities do not operate as exclusions
of, or limitations on, liability for death and
personal injury, rather they ‘simply shift
the source of compensation without
restricting the injured party’s right to cover’
(a quotation by Judge Barbier in
BP/Transocean), in the same way as this can
be transferred to an insurer. Further, with
regard to liability for property loss and
damage, KK Indemnities can be considered
to be reasonable due to the impracticability
of the alternatives, as discussed above, and
the fact that they are negotiated between
parties who have the benefit of legal advice
and who do not have disproportionately
unequal bargaining power.
Also, it appears from the Macondo cases
that KK Indemnities will generally be enforced
by US courts. This was affirmed by American
maritime lawyer LeRoy Lambert in an article
in Standard Bulletin following the Macondo
disaster and other articles in the same
publication asserted that KK Indemnities
would be effective under Brazilian law and
Mexican law.16 KK Indemnities are also
commonly used in oil and gas contracts for
the North West Shelf of Western Australia
(WA) and there is no reason to believe that
they would not be enforced by WA courts.
South/South East Asia has also widely adopted
KK indemnities17 and again they should be
enforceable in the relevant jurisdictions.
However, certain jurisdictions may have
public policy objections to certain aspects
Standard form
injury & loss/
damage KK
Pollution KK
Extension to party’s
Consequential loss
LOGIC Construction
Contract Ed, 2 Oct 2003
Company also
indemnifies Contractor
Group in respect
of loss/damage to
permanent third
party oil and gas
production facilities,
and consequential
losses (as defined)
Contractor indemnifies
Company Group
against claims in
respect of pollution
occurring on or
emanating from
Contractor Group’s
premises, property or
Company Group does
not include Company’s
other contractors.
Each party
indemnifies the other
against claims for
Consequential Loss (as
defined) from its party
Company Group
includes Company’s
other contractors.
Neither party is
responsible to
the other for
Damages (as defined).
Expressly stated that
all of these indemnities
and the pollution
indemnities apply
irrespective of cause
and notwithstanding
negligence or breach
of duty of indemnified
AIPN Model Well
Services Contract 2002
Operator also
Contractor in respect
of Contractor Group
equipment lost or
damaged Down Hole.
Indemnities do not
apply to death,
personal injury, loss
or damage caused by
gross negligence or
wilful misconduct of
the other party.
BIMCO Time Charter
Party for Offshore
Service Vessels 2005
Expressly stated that
indemnities apply even
if caused by the act,
neglect or default of
other party Group or
un-seaworthiness of
any vessel.
Company indemnifies
Contractor Group
against claims in
respect of pollution
emanating from the
reservoir or Company
Group’s property.
Operator indemnifies
Contractor against
claims arising from
a Work Site fire
or explosion or
blowout, cratering
or uncontrolled well
condition, regardless
of cause.
Alternative two also
adds an indemnity in
respect of each Party’s
Group Consequential
Damages claims.
Another Alternative
carves out gross
Alternative two carves
out gross negligence
(including wilful
misconduct), and
Alternative three also
carves out Negligence
up to a stated
monetary cap.
Owners indemnify
Charterers against
claims for pollution
damage arising from
acts or omissions
of Owners or their
personnel which cause
discharge, spills or leaks
from vessel other than
emanating from cargo
Charterer Group
includes Charterer’s
Each party
indemnifies the
other against claims
for consequential
damages (as defined)
from its party Group.
Charterers indemnify
Owners against claims
in respect of all other
pollution damage,
even if caused by the
act, neglect or default
of Owners Group or
un-seaworthiness of
any vessel.
of KK Indemnities (see below) or specific
legislation that imposes limitations on
KK Indemnities (for example, Texas,
Louisiana, New Mexico and Wyoming
have in place ‘Oilfield Anti-Indemnity
Acts’,18 and Part 1F of the Civil Liability
Act 2002 (a Western Australian statute)
undermines the ‘loss lies where it falls’
principle of KK Indemnities).
A survey of knock for knock
indemnity regimes
Knock for knock indemnities in standard
forms of contract
KK Indemnities are incorporated in many
standard forms of contract that are widely
used in the oil and gas and marine sectors
worldwide. The following table highlights
particular KK Indemnity provisions in certain
LOGIC, AIPN and BIMCO standard forms.
As can be seen from the table above,
KK Indemnities may:
• include a carve-out of gross negligence or
wilful misconduct;
• exclude the operator’s other contractors
from the definition of the operator group;
• include a modified KK Indemnity whereby
a contractor carries the risk of pollution
damage (or loss of, or damage to, the
operator’s property) caused by its group’s
negligence or breach up to a stated cap
(which may be intended to cover the
operator’s deductible under its insurances);
• include indemnities against each party
group’s claims for ‘consequential loss’
(as defined in the relevant standard form).
Indemnities against ‘consequential loss’ claims
by the other party’s group may be regarded as
‘belts and braces’ drafting,19 as such claims are
only likely to arise out of the negligence of a
contractor that results in physical damage and
economic loss consequential on that damage
(at least this is the position under English law
– see the judgment of Lord Denning MR in
Spartan Steel and Alloys Ltd v Martin & Co
(Contractors) Ltd, 1972 ABC L R 06/22).
Accordingly, such loss should fall within the
scope of a properly drafted KK Indemnity.
Separate knock for knock indemnity
schemes for operator’s other contractors
Where the operator’s other contractors
are not included in its group they will fall
to be treated as ordinary third parties (see
above). However, the contract may make
specific provision for such contractors. For
example, in the Western Australian oil and gas
sector, contractors may exchange reciprocal
indemnities in their respective contracts
to cover their respective groups’ claims
for death and personal injury, property
loss and damage and ‘consequential loss’
(as defined in the relevant contracts).
The contracts will usually provide that a
contractor group can only enforce such
indemnity if the contractor has provided
a reciprocal and enforceable indemnity in
favour of the defaulting contractor and its
contractor group.
Ten years ago, LOGIC introduced a
voluntary ‘IMHH’ (industry mutual hold
harmless) deed scheme which was
updated this year. The
scheme applies
to contractors
working on the UK continental shelf, and is
similar to the contractor reciprocal
indemnity scheme mentioned above.
Excluding liability in knock for knock
indemnities – how far can you go?
In the few cases where KK Indemnities
have been considered by the courts, certain
principles have emerged that apply to the
jurisdictions concerned.
Express statement of applicability to
negligence required
It is clear that English and US courts will not
construe a KK Indemnity as applying where
the indemnified party’s negligence has caused
the death, personal injury, loss, damage or
pollution in question (even if the clause states
that it applies whatsoever the cause) unless
the clause expressly states that it applies
notwithstanding such negligence.20
Public policy
In BP/Transocean, the Louisiana District Court
held that public policy does not prohibit
a party benefiting from an indemnity
against claims arising from its own gross
negligence (which some legal systems,
but not English law, recognise as a
distinct concept from negligence).
However, the Court also held
that where the objectives of
civil penalties are to punish
and deter (rather than
to compensate), then,
similar to punitive
damages, public policy prohibits contractual
indemnification of such penalties. It is also clear
that public policy in many jurisdictions will not
allow indemnities to extend to criminal fines and
penalties or indemnitees who have committed
fraud. In a separate Macondo case, Case 2:10-md02179–CJB-SS Document 5493 Filed 01/31/12, in
response to BP’s allegation that Halliburton had
made fraudulent statements and fraudulently
concealed material information, the Louisiana
District Court agreed ‘that fraud could void an
indemnity clause on public policy grounds’.
See also the English cases of Askey v Golden Wine
Company Limited and Others [1948] 2 All ER
35, and HIH Casualty and General Insurance
Ltd & Ors v Chase Manhattan Bank & Ors
[2003] UKHL 6 regarding criminal fines
and penalties, and fraud respectively.
Can an indemnitee’s breach of
contract invalidate a knock for
knock indemnity?
One area of uncertainty is whether
a breach of contract can invalidate
an indemnity. In the English case of
Smedvig Ltd v Elf Exploration UK Plc
(The Super Scorpio II) [1998] 2 Lloyd’s
Rep 659, a drilling contractor damaged
an ROV which was a Company Item
covered by a KK Indemnity in favour of
the contractor. However, the operator argued
that the damage was caused by the contractor
breaching an express contractual obligation to
take all necessary care of Company Items and
that such breach invalidated the indemnity.
The Court decided that this obligation was
not irreconcilable with the KK Indemnity,
which it upheld.
The English case of A Turtle Offshore SA &
Anor v Superior Trading Inc [2008] EWHC 3034
(Admlty) concerned a tug that was hired to
tow an offshore rig from Brazil to Cape Town,
but ran out of fuel. The rig was scuttled and its
owners brought a claim for damages against
the tug owners for the loss of the rig. The Court
held that whilst the tug owners were in breach
of their obligations under the tow contract
(TOWCON) to ensure that the tow carried
sufficient fuel and to use best endeavours to
perform the towage, the KK Indemnity in
favour of the tug owner covered the type of loss
that was the subject of the rig owners’ claim.
However, the Court also stated obiter dicta that
the KK Indemnity should be ‘construed in the
context of the TOWCON as a whole and to
give effect to the main purpose of the
TOWCON’, and should be construed as
‘applying so long as the tug owners are actually
performing their obligations under the
TOWCON, albeit not to the required standard’
to ensure that the tug owners’ obligations are
‘more than a mere declaration of intent’.
In BP/Transocean, BP argued that
Transocean had breached the contract and/
or acted in a way such as to materially increase
BP’s risk as indemnitor, thereby voiding the
indemnity. The Louisiana District Court
accepted that it was ‘possible that a breach of
‘The supply chain must be
incentivised to ensure that
risks are effectively identified
and managed to avoid
environmental damage’
a fundamental, core obligation of the contract
could invalidate this indemnity clause’ but was
not prepared to decide the issue in a summary
judgment application.
KK Indemnities seem to be an integral part of
the oil and gas industry worldwide (although
the courts limit their scope – primarily on
public policy grounds). It may be queried
whether, given BP’s huge pollution liabilities
as a result of the Macondo disaster, operators
should tr y to apportion more pollution
risk to the supply chain. Contractors may
counter that the oil companies (rather
than the contractors) have the financial
resources to carry and insure pollution risk
and they are therefore best-placed to manage
this risk (since they are in overall control
operationally) and should shoulder this risk
as they stand to make substantial profits from
the exploitation of oil and gas fields.
However, the supply chain must be
incentivised to ensure that risks are effectively
environmental damage. It is arguable
whether the prospect of criminal fines and
penalties (these being unlikely to be caught
by KK Indemnities), which may arise only in
the severest cases, and possible reputational
damage provide sufficient motivation. Whilst
KK Indemnities are likely to remain market
practice for the foreseeable future, in
relation to pollution risk operators may
increasingly insist on contractors bearing a
proportion of this risk where they are
negligent and on a gross negligence carveout from KK Indemnities.
1 See,
2 Report of the Montara Commission of Inquir y,
June 2010.
3 ‘Thai company fined $510,000 over Montara’,
The Australian (newspaper), 31 August 2012.
4 ‘It’s Claim and Counterclaim in Battle Over Timor Oil
Spill’, Jakarta Globe, 30 August 2010.
5 Remarks by the President [President Obama]
to the Nation on BP Oil Spill, 15 June 2010; see:
6 Final Report on the Investigation of the Macondo Well Blowout,
Deepwater Horizon Study Group, 1 March 2011.
7 US Department of the Interior: Secretary Salazar’s
Statement Regarding the Moratorium on Deepwater
Drilling, ‘Interior Issues Directive to Guide Safe,
Six-Month Moratorium on Deepwater Drilling’, 30 May
8 Report regarding the causes of the April 20, 2010
Macondo Well Blowout, The [US] Bureau of Ocean
Energy Management, Regulation and Enforcement,
14 September 2011.
9 Ibid.
10 ‘Tide of oil spill lawsuits begins to rise’, Chicago Tribune,
18 May 2010.
11‘BP, Halliburton, Transocean Get U.S. Violation
Notices’, Bloomberg, 13 October 2011.
12 ‘BP sues Halliburton and Transocean for $80bn over
Gulf of Mexico disaster’, The Telegraph, 21 April 2011.
13 ‘BP’s $7,8 billion Gulf spill pact wins initial court ok’,, 3 May 2012.
14 ‘US Nears BP Settlements’, US Edition of the Wall Street
Journal, 29 June 2012.
15 For example, see the Contracts (Rights of Third Parties)
Act 1999 which applies to English law contracts and the
Western Australian Property Act 1969.
16 The Standard Bulletin (Offshore Special Edition):
17Toby Hewitt, ‘An Asian perspective on model oil and gas
services contracts’, Herbert Smith, March 2009.
18‘Oilfield Anti-Indemnity Acts and Their Impact on
Insurance Coverage’, Insurance Journal, 22 August 2005.
19 Guidance Notes – International Model Contracts – Well
Services and Seismic Acquisition, AIPN, 2002.
20 See, for example, BP/Transocean and the English case
of EE Caledonia Ltd Orbit Valve Co Europe [1993] 1 WLR.
Chidi Egbochue is a senior associate at Herbert
Smith Freehills in London. The author is qualified in
English law only and this article does not constitute
and is not a substitute for legal advice.