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*Valentine Ataka is an Advocate of the High Court of Kenya, a blogger on Energy Law and Policy issues and an LLM Oil
& Gas Law Candidate (RGU-2013)
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TABLE OF CONTENTS
LIST OF ABBREVIATIONS ………………………………………………………….……………………………….2
ABSTRACT …………………………………………………………………………………………………………………. 2
1.0 INTRODUCTION ..……………………………………………………………….……………………....3
2.0 INDEMNITY…………………………………………………………………………..……………………….4
BIBLIOGRAPHY…………………………………………………………………………………………..……………..17
1
LIST OF ABBREVIATIONS
AIPN – Association of International Petroleum Negotiators
E&P – Exploration and Production
IMHH- Industry Mutual Hold Harmless Scheme
LOGIC - Leading Oil and Gas Industry Competitiveness
NOGEPA - Netherlands Oil and Gas Exploration and Production Association
O&G – Oil and Gas
ABSTRACT
This write-up presents an analysis of the various standard clauses used in Oil and
Gas Industry to apportion liability. The discussion focuses on standard provisions
for indemnity, exclusion and limitation of liability and relies on examples from
various model contracts, industry practice around the world as well as case law.
The approach taken in the brief is to discuss how such provisions can be negotiated,
drafted, interpreted and applied in order to effectively realize the intended object of
properly allocating contractual liability between and amongst parties in oil and gas
contracts.
2
1.0 INTRODUCTION
Players in the oil and gas industry have to contend with a wide range of risks1.
These include mechanical breakdowns, HSE accidents, unfavorable price changes
etc2. Atoning for the financial consequences of such risks can be very costly 3 and
may cause significant financial set-backs to the business.4To minimize exposure,
industry players usually undertake various measures and practices to manage the
risks. In a wide context, risk management includes prevention and mitigation of
risks and remediation of loss in the event of occurrence5.
One element of risk management is risk allocation between or among the parties
involved in an undertaking6. This is particularly problematic in the O&G industry
which is characterized by multiplicity of parties in one project7. Risk allocation in the
1
Greg Gordon, ‘Risk Allocation in Oil and Gas Contracts’ in Greg Gordon et al (eds) Oil and
Gas law: Current Practice and Emerging Trends’ (2nd Edn, Dundee University, 2011)
2
Tobby Hewitt, ‘Who is to Blame? Allocating Liability in Upstream Project Contracts’ Journal
of Energy & Natural Resources Law Vol 26 No 2 2008
3
Piper Alpha is said to have occasioned a total insured loss of US$3.304 billion; See
Hewitt, ibid
4
According to the Guardian the Deepwater Horizon incident has let to the dip of BP profits
by 35% See The Guardian, ‘BP's Deepwater Horizon costs rise $847m’ Tuesday 31 July
2012http://www.guardian.co.uk/business/2012/jul/31/bp-deepwater-horizon-costs
accessed 12th April 2013
5
Aven T et al ‘A Decision Framework For Risk Management, With Application To The
Offshore Oil And Gas Industry’ Reliability Engineering and System Safety 92 (2007) 433–
448
6
Adedeji Bodunde Badiru & Samuel Olusola Osisanya, Project Management for the Oil and
Gas Industry: A World System Approach (CRC Press, 2013) e-book
7
For instance according to the House of Lords in Caledonia Northsea vs British
Communication Plc & Others [2002] UKHL 4, the Piper Alpha project whose accident of 6 th
July 1988 killed over 160 workers, there were over 24 Contractors involved
3
industry may be achieved by setting out in the contracts clauses which declare
which party will be liable for (or exempted from) a given risk and to what extent.
There are three forms of risk allocation approaches common to contracts used in
the O&G industry8. These are
(a) Indemnity
(b) Exemption and
(c) Limitation of liability
2.0 INDEMNITY
2.1 Definition
Under an indemnity arrangement the indemnifying party agrees to make a
payment to the party having the benefit of the indemnity in the event that the
indemnified party suffers loss as a result of the occurrence of a specified event9.
In a more simple approach a Canadian Court in Lafrentz v. M & L Leasing10
defined contractual indemnity as ‘an obligation to protect against or keep free
from loss, to repay for what has been lost or damaged, to compensate for a loss’
8
Greg Gordon, (above n1)
9
ibid
10
2000 ABQB 714 (CanLII)
11
[2010] UKSC 18
4
operates only to create responsibility for the exposure of a party in the contract
then it would be ‘an exclusion’ clause.
2.2 Examples
An example of an indemnity Clause is set out at Clause 19.1 LOGIC Standard
Offshore Service Contract13 reproduced in part below:
19.1 The CONTRACTOR shall be responsible for and shall save, indemnify, defend
and hold harmless the COMPANY GROUP from and against all claims, losses,
damages, costs (including legal costs) expenses and liabilities in respect of:
(a) loss of or damage to property …….
The addition of the term ‘defend’ to the obligation of the indemnifier for example in
the LOGIC contract above implies that the obligation extends to conducting the
defence of any litigation that may arise against the benefiting party.14
12
Gordon (above n1)
13
LOGIC, ‘Standard Contracts for the UK Offshore Oil and Gas Industry: Service Onshore &
Offshore’ http://www.logic-
oil.com/sites/default/files/documents/Services%20Onshore%20and%20Offshore%20Edition
%202.pdf accessed 3rd March 2013
14
Gordon (above n1)
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2.3 Interpretation of Indemnity Clauses
2.3.1 Contextualism
Courts will construe an indemnity clause in the context of the entire contract. This
resonates with Lord Hoffman’s restatement in Investors Compensation Scheme
Ltd vs West Bromwich Building Society15. He acknowledged that while the old
rule of ‘objective bystander’ still applied in interpretation of contracts, such a
bystander should be assumed to be informed of most of the background facts to the
disputing parties’ contract.
15
[1998] 1WLR 896
16
Ibid
17
[2006] CSOH 104 paragraph 12
18
Ibid
6
The Court interpreted ‘personnel of the others’ to mean that the three parties in the
contract (say A, B and C) had agreed that A would indemnify B&C for the injury of
B&C’s personnel, B had agreed to indemnify A&C for the injury of A&C’s personnel
and similarly C to indemnify A&B’s for the injury of A&B’s personnel. While
concerned that this interpretation ‘was not supported by any commercial or
business commonsense’ Lord Glennie held that since it was the clear wording of the
Clause, it would be upheld.
19
[2004] All ER (D) 87
20
[2002] UKHL 4
7
2.4.3 Extension of scope to third Parties
Indemnity will ordinarily not extend to third parties if not contemplated by the
contract. In Westerngeco v ATP Oil & Gas,21a contractor (Westerngeco) entered
into a contract for streaming of seismic cables from a vessel with ATP (company)
whereby
‘The parties agree[d] that the Contractor’s Group’s [the claimant’s] liability under
this Contract shall not exceed the aggregate amount of payments received by the
Contractor for the work and Company [Clause 19.8]
The Court found that the words ‘under this Contract’ in Clause 19.8 referred to the
defendant only hence held that a limitation of liability could only be effective to limit
liability to the other contracting party, not third parties.
21
[2006] All ER (D) 254
LOGIC
22
‘Mutual Indemnity And Hold Harmless Deed’(2012) http://www.logic-
oil.com/sites/default/files/documents/IMHH%202012%20Deed.pdf Accessed 12th April 2013
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(iii) Consequential Loss ……...
The Deed extends the scope of indemnity to the signatories and their affiliates,
personnel and invitees23. At Clause 5.1 it also resolves the subrogation problem by
enjoining signatories to procure waiver of subrogation rights from their respective
insurers.
The deed however serves only as a gap filler since it does not take precedence over
any existing indemnity agreements between parties.24 Further being a voluntary
Scheme, it has been shunned by some important players in the industry such as
several large drilling companies who are wary of the potential losses which they
may suffer since they have relatively larger numbers of personnel on the
platforms.25
23
See definition of ‘Group’ under Clause 1 in reference to the entitlement of ‘Groups’ under
Clause 2
24
Clause 11 of the Deed
25
Gordon (above n1)
26
NOGEPA, ‘Mutual Indemnity Agreement’
http://www.nogepa.nl/en/Home/MIAwederzijdsevrijwaring.aspx accessed 20th April 2013
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3.0 EXCLUSION OF LIABILITY
3.1 Definition
The sum effect of an exclusion clause is to absolve a party from responsibility for
loss arising from an identified risk27. The absolution may be in respect of a class of
risks or any risks whatsoever arising from the contract.
These provisions in a contract create a class of injury or loss whose occurrence are
expressed not to be qualified for remediation by the party with the obligation to
remedy the risk covered.
The common law basis for this kind of exclusion is inferable from the celebrated
case of Hadely vs Baxendale28 which established the two-limb rule that an injured
party can only claim
(i) damages that are fairly and reasonably considered to have arisen
naturally from the breach itself, or
(ii) such damages as may be reasonably supposed to have been in the
contemplation of both parties at the time the contract was made.
The English courts have held the view that Consequential loss for the purposes of
exclusion connotes matters falling under the second limb in Hadley vs. Baxendale
such as production costs and loss of profit by relating it to. For instance in
Croudace Construction v Cawoods Concrete Products29 the liability clause
provided that:
we are not under any circumstances to be liable for any consequential loss or
damage caused or arising by reason of late supply or any fault failure or defect in
27
Fastard Case [2010] UKSC 18
29
[1978] 2 Lloyds Rep 55 CA
10
any material or goods supplied by us or by reason of the same not being of the
quality or specification ordered or by any other matter whatsoever.
The Court of Appeal in England held that the word consequential excluded any loss
which directly and naturally resulted in the ordinary course of events from late
delivery which included the indemnification of a claim made by sub-contractors
against the claimants. The claim was made in respect of a delay in the sub-
contractors’ work which was said to have been caused by the absence of the
material which the defendants ought to have delivered.
30
[2008] VSCA 26
31
Timur Makarov, ‘Indemnity in the International Oil and Gas contracts: Key Features,
Drafting and Interpretation’(CEPMLP, June 2009)
11
In the Red Sea Tankers Ltd v Papchristidis32the Court described ‘gross
negligence’ as embracing:
serious negligence amounting to reckless disregard without any necessary
implication of consciousness of the high degree of risk or the likely consequences
of the conduct on the part of the person acting or omitting to act;
Wilful misconduct in such a special condition means misconduct to which the will
is party as contradistinguished from accident, and is far beyond any negligence,
even gross or culpable negligence, and involves that a person wilfully misconducts
himself who knows and appreciates that it is wrong conduct on his part in the
existing circumstances to do, or to fail or omit to do (as the case may be), a
particular thing, and yet intentionally does, or fails or omits to do it, or persists in
the act, failure, or omission regardless of consequences.
32
[1997] 2 Lloyd’s Rep 547
33
[1993] 2 Lloyd’s Rep 582
34
[1901] 2 IE 13
35
[2010] EWHC (TCC)
12
The ingredients of wilful conduct as interpreted by the English Courts
therefore include knowledge, intention and recklessness.
it does not follow that because there is no express reference to the exclusion or
limitation of liability the agreement cannot have the effect on its true construction
of clearly providing for the consequences of breach or other fault.
Saville in that case J followed the decision in The Evia38, where it was held that a
provision requiring charterers to pay for extra insurance if the vessel was ordered
into a war zone should be construed as providing exclusively for the consequences
of the charterers’ breach in ordering the vessel to such a zone, though the provision
did not expressly limit liability to the amount of the extra premiums.
36
[2010] SCC 4 (S.C.C.)
37
[1988] 1 Lloyd’s Rep. 145 at 157
38
[1982] 2 Lloyd’s Rep. 307
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4.0 LIMITATION OF LIBILITY
4.1 Definition
A liability clause may apportion the responsibility for remedying loss arising out of
an act of the benefiting party but at the same time put a cap on it39. The cap may
be on the basis of a predetermined portion of the loss or a fixed sum40.
This type of limitation is used especially in O&G contracts where there is a prospect
of unlimited and potentially exorbitant liability if left unchecked42. They may serve
39
Glenn D. Well et al, ‘Contracting to Avoid Extra-Contractual Liability—Can Your
Contractual Deal Ever Really Be the “Entire” Deal?’(2007)
http://www.weil.com/files/Publication/563ccf98-648d-4e5b-b3e5-
129805230615/Presentation/PublicationAttachment/fb77618a-f943-4797-98a1-
2a69d92a4522/Extra-Contractual%20Liability%20Article.pdf accessed 13th April 2013
40
Gordon (above n1)
41
LOGIC, ‘General Conditions of CONTRACT for Supply of Major items of Plant and
Equipment’ http://www.logic-
oil.com/sites/default/files/documents/Supply%20of%20Major%20Items%20of%20Plant%2
0and%20Equipment%20Edition%202.pdf Accessed 3rd April 2013
42
Gordon (above) pg 497
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as a compromise where the parties cannot agree on a mutual hold harmless
indemnity or exclusion of consequential loss provision.
They are advisable in the Oil and Gas industry for two key reasons summed up by
Gordon as follows
(1) Some O&G projects are so valuable that even the potential losses which are
unequivocally direct may be more than a contactor can bear; (2) even if the losses
which the contractor fears should be shut out by the indemnity or exclusion clause
there is always a risk that those clauses might for some reason be susceptible to
challenge. A liability cap therefore performs the valuable function of providing a
second line of defence of indeterminate or disproportionate liability
(A) Except as set out in this Article 4.6, neither the party designated as operator nor
any other indemnitee (as defined below) shall bear (except as a party to the
extent of its participating interest share) any damage, loss, cost, expense or
liability resulting from performing (or failing to perform) the duties and functions
of the operator, and the indemnitees are hereby released from liability to non-
operators for any and all damages, losses, costs, expenses and liabilities arising
out of, incident to or resulting from such performance or failure to perform, even
though caused in whole or in part by a pre-existing defect, the negligence
(whether sole, joint or concurrent), gross negligence, strict liability or other legal
fault of operator (or any such indemnitee).
5.0 CONCLUSION
43
AIPN ‘Model International Operating Agreement’ (1995)
15
difficult purpose of balancing the interests of the often multiple parties in O&G
undertakings.
Each negotiating party must secure a scope that serves its interest since
the court may extend scope to liability not anticipated unless the parties
are unequivocal on the scope.45
Above all, interpretation of the clauses should be approached objectively taking into
account the discernible intention of the parties as well as the contractual and the
commercial context of the parties’ engagement.
44
Canada Steamship Lines Ltd. v. The King (1952)
45
Campbell vs Conoco [2002] All ER (D) 4
46
Gordon
47
As endorsed by Atlantic Richfield Co. v. Petroleum Personnel Inc 758 S.W.2d 843 (1988)
16
BIBLIOGRAPHY
Statutes
Oilfield Anti-Indemnity Act, 1973 (Texas)
Books
Greg Gordon et al (eds) Oil and Gas law: Current Practice and Emerging Trends’ (2nd Edn,
Dundee University, 2011)
Adedeji Bodunde Badiru & Samuel Olusola Osisanya, Project Management for the Oil and
Gas Industry: A World System Approach (CRC Press, 2013) e-book
Case law
Atlantic Richfield Co. v. Petroleum Personnel Inc 758 S.W.2d 843 (1988)
BP Exploration Operating Co. Ltd. V. Kvaerner Oilfield Products Ltd [2004] All ER (D) 87
Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26
Investors Compensation Scheme Ltd vs West Bromwich Building Society [1998] 1WLR 896
National Oilwell (UK) Ltd v Davy Offshore Ltd[1993] 2 Lloyd’s Rep 582
17
The Evia [1982] 2 Lloyd’s Rep. 307
Articles
Aven T et al ‘A Decision Framework For Risk Management, With Application To The Offshore
Oil And Gas Industry’ Reliability Engineering and System Safety 92 (2007) 433–448
Greg Gordon, ‘Risk Allocation in Oil and Gas Contracts’ in Greg Gordon et al (eds) Oil and
Gas law: Current Practice and Emerging Trends’ (2nd Edn, Dundee University, 2011)
Timur Makarov, ‘Indemnity in the International Oil and Gas contracts: Key Features,
Drafting and Interpretation’(CEPMLP, June 2009)
Tobby Hewitt, ‘Who is to Blame? Allocating Liability in Upstream Project Contracts’ Journal
of Energy & Natural Resources Law Vol 26 No 2 2008
Others
LOGIC - -‘Standard Contracts for the UK Offshore Oil and Gas Industry: Service
Onshore & Offshore’ http://www.logic-
oil.com/sites/default/files/documents/Services%20Onshore%20and%20Offsh
ore%20Edition%202.pdf accessed 3rd March 2013
The Guardian, ‘BP's Deepwater Horizon costs rise $847m’ Tuesday 31 July
2012http://www.guardian.co.uk/business/2012/jul/31/bp-deepwater-horizon-costs
accessed 12th April 2013
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