1

THE OIL & GAS

“CONTRACTING COMPASS”

6 – POINTING THE COMPASS

TOWARD INDEMNITIES

1

INTRODUCTION

Welcome to the sixth white paper of the “Contracting Compass” seminar series – a Brodies oil and gas

initiative to provide insight on issues of English law relevant to oil and gas contracts. Recognising that the

landscape of the contract is sometimes difficult to navigate, the “Contracting Compass” provides a continuing

commentary on English law by highlighting key clauses from the contract and focusing on particular points of

law and practice most relevant to each clause in a way which heightens awareness of the whole of the

landscape.

As shown in the image below, we have changed the directional points of the compass.

The compass is labelled in this way because navigating the landscape of a contract requires knowledge of the

law, an understanding of how language should be drafted in light of the law, and recognition of how that

language will work in practice – whether it relates to contract performance, the ultimate commercial concern

of payment or, if a breach has occurred, damages or other remedies.

For each seminar in the series, we will present a white paper dedicated to a single topic. This paper covers the

topic of Liabilities and Indemnities. We hope you find this paper to be of use and if you are interested in

attending any of our accompanying seminar series, please do not hesitate to contact us directly.

GREG MAY KEN MACDONALD

PARTNER, OIL & GAS PARTNER, LITIGATION greg.may@brodies.com ken.macdonald@brodies.com

01224 392 255 01224 392 170

1

INDEMNITIES

BACKGROUND

Indemnities are a contractual tool for transferring risk. Where parties to a commercial relationship recognise

that certain risks in connection with a contract may arise at law in a way that is inconsistent with their

relationship, they will use indemnities under a contract as a means of reallocating it. Altering the common law

position allows the parties to rebalance the relationship more closely to a point of commercial equilibrium –

thereby ensuring that the person best positioned to assume a risk will be the one that bears it.

There are a number of factors relevant to an assessment of who is commercially best placed to assume a risk.

The availability of insurance for a particular risk is an important factor. Another factor is the relative size of the

contracting entities - not only because a larger company with a more substantial balance sheet will be better

placed to assume the direct costs and expenses in respect of any uninsured risk, but a larger company may also

have a captive insurance programme within the corporate group and choose to “self-insure” and/or carry

certain risks on the balance sheet. The magnitude of the risk is also relevant. A smaller contractor may be in a

sufficiently strong commercial position to offer indemnity up to a certain amount but claims that exceed that

amount may not represent a commercially viable risk/reward ratio for a particular scope of work and the

compensation corresponding to such scope.

It is also important to recognise that organisations and individuals in the oil and gas industry will frequently

operate in an offshore environment where sophisticated equipment will be utilised, large scale infrastructure

will be occupied, high value commodities with unstable properties will be extracted and transported, volatile

and extreme weather conditions will be confronted, and unpredictable geological conditions deep below the

seabed will be managed and controlled by individuals working remotely – either at the surface of the water or

onshore. Remote decisions will be made every minute of every day – often critical and accompanied by the risk

of catastrophic consequences. Moreover, a significant amount of tangible property is required, both onshore

and offshore, to support the industry and a significant number of people across multiple disciplines are

required to engineer, install, operate and maintain that property.

Against this backdrop, a number of elaborate contracting principles have evolved in the oil and gas industry –

and the indemnity regime of an offshore services contract is no exception. It is often framed in a complex

structure and written in language difficult to decipher. In this paper we will look, in depth, at both the language

and framework of a typical indemnity regime. A structured process is often, from a practical perspective, the

most effective way to understand and analyse an indemnity regime. Where the framework of a typical

indemnity clause in an oil and gas contract is complex and, to the extent such complexity leads to complicated

language, we have highlighted in this paper some steps that may be considered as a systematic approach to

dissecting and deciphering an indemnity regime.

2

The approach is predicated on “five questions” and this paper therefore comprises five sections, with each

section addressing one of the following five questions in turn.

PART 1 – “Who” is assuming the indemnity obligation and who is receiving the benefit?

PART 2 – To “What” does the indemnity apply?

PART 3 – “Where” does the indemnity apply?

PART 4 – “When” does the indemnity apply?

PART 5 – “How” does the indemnity apply?

Each of the five sections will also comprise two parts. Part one looks at each question from the practical

perspective of why the indemnity matters and what purpose it serves, as well as how it can best be drafted.

Part two complements the practical perspective by looking at the law – i.e. the body of English case law and

relevant statutes which have created those principles most relevant to understanding and applying best

practice to the process of building an effective indemnity regime.

It is noteworthy, however, to acknowledge at the outset of this paper that indemnity obligations are not only

found in those provisions of the contract that transfer liability for catastrophic risk. Indemnities also feature in

other clauses, such as those related to intellectual property, tax, liens, and business ethics, or when the parties

seek to allocate risk resulting from a breach of law. Liability for what is commonly referred to as “consequential

loss” is also often allocated by way of indemnity. These other indemnities are beyond the scope of this paper.

3

PART 1 – “WHO” IS ASSUMING THE INDEMNITY OBLIGATION AND WHO IS

RECEIVING THE BENEFIT?

LOOKING AT THE CONTRACT

Principles-To-Practice

Starting with a definition, the concept of “indemnity” is defined as:

“One person taking on the obligation to pay for any loss or damage that has been or might be incurred by

another individual. The right to receive the benefit of an indemnity and the duty to indemnify ordinarily stem

from a contractual agreement, which generally protects against liability, loss, or damage”.

An indemnity is therefore, by definition, recognised as a creature of contract. It is always expressed in a

contract as an obligation assumed and a benefit received. For that reason, the first question (i.e. the “Who”

question) is one of two parts – first “Who” is assuming the contractual obligation and, second, “Who” is

receiving the benefit.

The answer to the first part of the first question is simple – the “contractual obligation” will always be assumed

by one person, and that one person will always be one of the parties to the contract. As explained in more

detail below in Looking at the Law, a contract cannot impose a burden on a person who is not a party to the

contract.

An offshore project for the exploration, development and production of hydrocarbons will comprise many

contracts, many of which will have significant value. A large number of those contracts will be characterised as

“prime contracts”, i.e. held by an operator (typically acting on behalf of co-venturers under a joint operating

agreement (JOA), both in the United Kingdom Continental Shelf (UKCS) and many other jurisdictions) and

entered into with contractors at the top tier of the supply chain. Therefore, assuming that operator “A” has

entered into a contract with a prime contractor “B”, the “liability and indemnity” clause of a typical oil and gas

services agreement will, if properly drafted, always provide that each of the indemnities comprising the regime

will be assumed, as an obligation, by either operator “A” or contractor “B”.

The answer to the second part of the first question is not as simple. The benefit of the indemnity will not

always be conferred on one person – in fact, it will typically be given to a group of people, a vast majority of

which will not be a party to the contract. As further explained below in Looking at the Law, the rule of privity of

contract under English law has historically prevented, in principle, the giving of benefits to a non-party;

however, in legislation was enacted for the express purpose of enabling parties to a contract to bypass the

rule, namely “The Contracts (Rights of Third Parties) Act 1999”.

Prior to the 1999 Act, a much more complicated contractual structure was required for transferring benefits to

a non-party – i.e. a mechanism whereby the principal party to the contract would act in a trust capacity for the

limited purpose of receiving, holding and passing benefits to a non-party. This type of structure, commonly

referred to as a Himalaya clause, was rendered obsolete by enactment of the 1999 Act. Post-1999, the

structure of a typical indemnity regime in an oil and gas contract has evolved to provide more direct

mechanisms for passing the benefit of indemnities to non-parties and parties alike.

4

In the following paragraphs, we have therefore covered in detail the particular type of language that should be

considered and the particular questions and concerns that should be addressed by an in-house practitioner

when answering the second part of the “Who” question. The most effective way to answer the second part of

the “Who” question is to consider it from two perspectives. First, from the perspective of the indemnity

obligation being assumed by the operator and “Who” (i.e. what group of people) should be receiving the

benefit of that indemnity. Second, from the perspective of the indemnity obligation being assumed by the

contractor and “Who” (i.e. what group of people) should be receiving the benefit of that indemnity.

Indemnity from the operator – “Who” receives it?

Turning to the second part of the question from the perspective of the operator’s indemnity obligation, it is

common practice to draft a definition of “Contractor Group” to clearly identify each person that is an intended

beneficiary of the operator’s indemnity. This approach is reflected in the LOGIC suite of model contracts and

we have referred to relevant language from LOGIC in the “Drafting Tips” below, as a point of reference.

Assuming the existence of a prime contract between the operator and a top tier contractor, the definition of

“Contractor Group” should always identify, first and foremost, the prime contractor as a member of the

defined “Group”. As reflected below, the standard LOGIC definition does so. In any oil and gas services

contract, it will always be the intent of the parties for the prime contractor to, in the first instance, receive the

benefit of the indemnities set forth in the relevant indemnity regime.

As mentioned above, the magnitude of total costs for any offshore project will often be in the order of billions

of pounds. A prime contract will also typically comprise a significant portion of a scope of work (e.g. dayrate

drilling agreement or subsea construction contract), with a value itself in the order of hundreds of millions of

pounds. It follows therefore that a prime contractor will, in most circumstances, be a very substantial multi-

national corporation with operations of world-wide scope and a company structure of complex configuration

with many affiliated entities in multiple jurisdictions – all existing for various reasons related, inter alia, to tax,

accounting and corporate governance. It is therefore necessary for any definition of “Contractor Group”

created for the purpose of conferring the benefit of an operator’s indemnity to clearly define “Affiliates” and

clearly identify all relevant “Affiliates” of the Contractor as a member of the Contractor Group. In the “Drafting

Tips” below, we have set forth relevant LOGIC language in this regard. (Also, see discussion of the Farstad case

in Looking at the Law below.)

Where an offshore project will comprise many contracts and the operator will be a principal party to a large

number of those, the operator will not be a party to all contracts related to an offshore project. Assuming a top

tier contractor and the operator have agreed a particular scope of work in the prime contract, the top tier

contractor will often subcontract a part, if not a substantial part of the scope to 2nd

tier subcontractors. These

2nd

tier subcontractors will not be in privity of contract with the operator, but will be at the operator’s offshore

worksite and should therefore, in principle, receive the benefit of the indemnities from the operator. It is

therefore common practice for any definition of “Contractor Group” to clearly define “Subcontractor” and

clearly identify all relevant “Subcontractors” of the prime Contractor as a member of the Contractor Group. As

reflected below in the “Drafting Tips”, LOGIC does have a definition of “Subcontractor” that encompasses all

2nd

tier subcontractors and LOGIC also includes all “Subcontractors”, as defined, in the definition of Contractor

Group.

It is also relevant, however, to recognise that any 2nd

tier subcontractors involved in an offshore project may

also, from time-to-time, subcontract a part of their scope of work to a 3rd

tier subcontractor. Likewise, a 3rd

tier

5

subcontractor may subcontract a portion of its scope of work to a 4th

tier subcontractor, and so on. These

multiple tiers of subcontractor relationships will result in a multi-layered supply chain sitting beneath the top

tier prime contractor.

If 3rd

and 4th

tier subcontractors are involved in an offshore project, they will also be at the operator’s offshore

worksite and should therefore, in principle, receive the benefit of the indemnities from the operator. However,

referring to the LOGIC definition of “Subcontractor” in the “Drafting Tips” below, it is noteworthy that this

definition only encompasses 2nd

tier subcontractors with whom the prime contractor has a direct contractual

relationship; it does not include 3rd

and 4th

tier subcontractors with whom the prime contractor has an indirect

relationship. Therefore, the relevant 3rd

and 4th

tier subcontractors will not receive the benefit of the

operator’s indemnity directly under the terms of the prime contract and, in the absence such benefit flowing

directly from the prime contract, the only contractual means for passing the relevant benefit to 3rd

and 4th

tier

subcontractors will be including back-to-back indemnity provisions in the subcontract between the 2nd

tier

subcontractor and the 3rd

tier subcontractor, and so on down any additional tiers of the supply chain. The

above described requirement for back-to-back language can be avoided by revising the LOGIC definition of

“Subcontract” to read as follows - "SUBCONTRACT" shall mean any contract between the CONTRACTOR and

any party (other than the COMPANY or any employees of the CONTRACTOR) and any contract between such

party and any other party of any tier for the performance of any part of the WORK.”

It is assumed that LOGIC model language for the definition of “Subcontractor” has not been drafted to include

3rd

and 4th

tier subcontractors because of concerns expressed by prime contractors that the definition of

“Subcontractors” also appears frequently throughout LOGIC in non-indemnity provisions. For example, across

the entire suite of LOGIC model contracts the prime contractor will have obligations to the operator to ensure

that “it and its Subcontractors” comply with obligations in respect of tax, confidentiality, audit and insurance

obligations. It is therefore assumed that prime contractors have expressed a strong preference that the LOGIC

model contracts be drafted with a narrow definition of “Subcontractor” to avoid the prime contractor having

the foregoing obligations in respect of 3rd

and 4th

tier subcontractors with whom it will not have a direct

contractual relationship.

As reflected in the “Drafting Tips” below, all LOGIC model contracts also feature language that identifies

“Affiliates” of the “Subcontractors” as a member of the “Contractor Group“, as well as “the respective

directors, officers, and employees (including agency personnel)” of the “Contractor”, “Subcontractors” and any

of their respective “Affiliates”.

As a final note in respect of indemnities received from the operator and the definition of “Contractor Group”,

we refer to LOGIC Mobile Offshore Drilling Units, Edition 1, 1997 (MODU 97)which has a definition of

“Contractor Group” with additional members – namely, the “DRILLING UNIT and the legal and beneficial

owners thereof”. It is recognised that an indemnity claim could be made “in rem” against the Drilling Unit, in its

own right. An action in rem would not be a claim against the owner of the property; it would be a claim made

against the Drilling Unit, itself. Given the potential for this type of claim to be made, in particular under

admiralty jurisdiction, it is best practice when drafting a dayrate drilling contract to make specific reference to

the Drilling Unit as a separate member of the Contractor Group.

6

Indemnity from contractor – “Who” receives it?

Turning to the second part of the question from the perspective of the contractor’s indemnity obligation, it is

common practice to draft a definition of “Company Group” to also clearly identify each person that is an

intended beneficiary of the Contractor’s indemnity. This approach is reflected in the LOGIC suite of model

contracts and we have referred to relevant language from LOGIC in the “Drafting Tips” below, as a point of

reference.

Having described a prime contractor for a significant value offshore project as typically being multi-national,

with a complex organisational structure, an operator will typically have the same complex structure, and the

same multi-national presence. For this reason, a definition of “Company Group” created for the purpose of

passing the benefit of a contractor’s indemnity will clearly define “Affiliates” and clearly identify “Affiliates” of

the Company as a member of the Company Group. In the “Drafting Tips” below, we have set forth relevant

LOGIC language in this regard.

As mentioned above, when an operator enters into a top tier agreement with a prime contractor, it will

typically be acting in the capacity of operator under a JOA and contracting on behalf of itself and the other co-

venturers under the JOA. Therefore, it is common practice for a definition of “Company Group” to clearly

define “Co-venturers” and clearly identify all relevant “Co-venturers” as a member of the Company Group.

Again, we have set forth relevant LOGIC language in the “Drafting Tips” below.

It is also common practice for a definition of “Company Group” to identify “Affiliates” of the “Co-venturers” as

a member of the Group, as well as the “respective directors, officers, and employees (including agency

personnel)” of the “Company”, the “Co-venturers” and any of their respective “Affiliates”. This is also reflected

in the LOGIC language shown in the “Drafting Tips” below.

As a final note in respect of indemnities received from the contractor and the definition of “Company Group”,

it is important to highlight that LOGIC does not include the Company’s “other contractors” as a member of the

“Company Group”. As mentioned above, an offshore project will typically involve multiple “top tier”

contractors and the operator will have a direct contractual relationship with each of them. All of these top tier

contractors will be working in close proximity, in a high risk environment but will not be in privity of contract

with each other. Therefore, there are only two contractual mechanisms by which each of these prime

contractors can receive the benefit of indemnities from the other prime contractors and any other contractors

of any tier that sit beneath the other prime contractors.

The first mechanism is one which provides for a definition of “Company Group” to include “other contractors

of the Company of any tier” as a member of the Group (i.e. the large family approach). This mechanism relies

upon the operator having a direct or indirect contractual relationship with every entity involved in the offshore

project and this contractual nexus is the conduit through which one prime contractor is able to pass the benefit

of indemnities to all other prime contractors in a direct contractual relationship with the operator and all other

contractors of any tier that sit beneath the prime contractors. As mentioned above, this mechanism is not

utilised in LOGIC.

The second mechanism is one that must be utilised when the definition of “Company Group”, as reflected in

LOGIC, does not include “other contractors of the Company of any tier” as a member of the Group (i.e. the

small family approach). By omitting “other contractors of the Company of any tier” from the definition of

“Company Group”, the conduit for passing the benefit of indemnities through the contract with the operator is

7

blocked and therefore an alternative, second mechanism must be created to create a substitute contractual

nexus and conduit for passing the benefit of indemnities between prime contractors and all of the respective

other contractors of any tier that sit beneath the respective prime contractors.

This alternative, second mechanism is typically described as an “indemnity and mutual hold harmless regime”

(i.e. “MHH”) and it functions, in essence, as a multi-lateral contract among all of the prime contractors and the

subcontractors of every tier sitting beneath them whereby mutual obligations of indemnity are assumed by

each of these parties to the MHH and mutual benefits of indemnity are passed to each of the parties to the

MHH on a reciprocal basis in respect of people, property and consequential loss.

In the UKCS there is an industry-wide MHH which is referred to as the Industry Mutual Hold Harmless (“IMHH”)

regime. The IMHH is designed, in principle, to allocate risk among all members of the contracting community in

the offshore environment of the UKCS. However, this safety net of mutual indemnity protection only applies to

“all members of the UKCS contracting community” to the extent that “all members of the community” are a

signatory to the regime. At the time of writing, over 1000 entities are signed up to the IMHH. It operates in a

similar way to a typical MHH regime by allocating liability and conferring the benefit of indemnities on a

reciprocal basis among all signatories in respect of people, property and consequential loss. For various

reasons beyond the scope of this paper, the IMHH does not permit air transport services to participate, and a

significant proportion of the dayrate drilling contractor community has declined to participate.

Relying on the IMHH is not without risk because of the obvious potential for a gap in cover where one party

working in the offshore environment is not a signatory. Certain operators have taken the view that the IMHH is

not the most effective means of managing the risk relating to the horizontal relationships in their supply chain

and have developed a separate, stand-alone MHH as a substitute. Alternative stand-alone MHH regimes are

not considered in detail in this paper, but suffice to say that they will, in essence, typically take one of two

forms.

One type of form will be a conventional multi-lateral mutual indemnity relationship created among all top-tier

contractors and their respective subcontractors of any tier by the operator requiring, as a condition of its direct

contract with each top tier contractor, that the prime contractor sign a mutual indemnity counterpart and also

require the prime contractor to require, as a condition of its contract with each of its subcontractors, that each

2nd

tier subcontractor sign the same mutual indemnity counterpart and require, as a condition of its contract

with each of its 3rd

tier subcontractors, that they also sign the same counterpart and impose the same

obligation on other subcontractors of every other tier throughout the supply chain.

The other type of form will be the inclusion of a clause in the body of the contract between the operator and

the prime contractor intended to have the same effect as an MHH. An example of such a clause that pre-dated

the existence of the IMHH is found in Edition 2 of LOGIC Well Services - i.e. it provides in each of the top tier

contracts between the operator and prime contractors that each prime contractor, for example prime

contractor “A”, will assume an indemnity obligation in respect of people, property and consequential loss of all

members of the prime contractor’s group (defined as including the prime contractor’s subcontractors of any

tier) and pass the benefit of such indemnity to each of the other prime contractors, for example prime

contractors “B”, “C” and “D”, provided such other prime contractors have assumed the same indemnity

obligation in their top tier contract with the operator and passed the benefit of such indemnity to prime

contractor “A” on a reciprocal basis.

8

To be effective, either of these alternative stand-alone regimes will require a significant amount of oversight

and administration because, in theory, the operator should keep the entirety of its offshore contracting

community informed as to each of the counter-parties with whom they are in a mutual hold harmless and

indemnity relationship. Only with this information can a contractor mobilising to the offshore worksite

properly assess the risk of working in the proximity of other contractors with whom it is not in a direct

contractual relationship.

LOOKING AT THE LAW

As mentioned briefly above in Looking at the Contract, the common law doctrine of privity of contract under

English law means that a contract cannot confer rights or impose obligations on persons/companies that are

not party to the contract. The Contracts (Rights of Third Parties) Act 1999 modified this doctrine. The Act

provides that a third party right will be enforceable not only if the contract expressly says so, but also if the

contract "purports" to confer a benefit on a third party. A contract cannot impose a burden on a

person/company who is not a party to the contract. However, it is possible to provide that the third party right

will only be enforceable once the third party has complied with some pre-conditions. The third party is not

contractually obliged to comply with any pre-condition and if it chooses not to comply then it simply foregoes

its third party right. English law goes further still in that it protects a third party from variations to and

rescission of a contract, upon which he relies, without his consent. Given this statutory right, it is important

when drafting an indemnity regime to clearly specify to whom any benefit should extend and frequently it is

appropriate to exclude the Contracts (Rights of Third Parties) Act 1999.

In Looking at the Contract we covered in detail some of the possible definitions of the parties that may come

up in an indemnity. In the case of Farstad v. Enviroco (2011) the court was asked to consider “who” could

receive an indemnity.

Farstad Supply AS (“Farstad”) was the owner of an oil supply vessel which was chartered to ASCO UK

Limited (“ASCO”). The supply vessel was berthed, and was undergoing works which were carried out by

Enviroco Limited (“Enviroco”). On ASCO’s instructions, the master of the supply vessel started the engines

to move the vessel to another berth. An Enviroco employee had left a valve open whilst carrying out

works and as a result of the valve having been left open, oil was released onto the engine room floor. The

oil caught fire and the fire killed an Enviroco employee and damaged the vessel.

Farstad sued Enviroco for negligence. Enviroco in turn brought ASCO in as a third party, arguing that they

were partly responsible for the damage in that they failed to supervise the operations.

The charterparty agreement provided that Farstad would indemnify ASCO and ASCO's "affiliates" against

various liabilities. Enviroco claimed to be a subsidiary of ASCO's parent. Enviroco therefore claimed that

Farstad was obliged to indemnify it under the terms of the charterparty agreement for the losses claimed

by Farstad. The result of this, if accepted, would have been that Enviroco had no liability to Farstad.

The charterparty agreement defined “affiliate” as including any other "subsidiary" of a company of which

ASCO was a subsidiary. The term "subsidiary" was defined as bearing the meaning in section 736 of the

Companies Act 1985 (now Section 1159 and Schedule 6 of the Companies Act 2006).

9

Section 1159 sets out the definition of subsidiary in terms of the Act. It provides:

1. A company is a “subsidiary” of another company, its “holding company”, if that other company—

(a) holds a majority of the voting rights in it, or

(b) is a member of it and has the right to appoint or remove a majority of its board of directors, or

(c) is a member of it and controls alone, pursuant to an agreement with other members, a

majority of the voting rights in it,

(d) or if it is a subsidiary of a company that is itself a subsidiary of that other company.

2. A company is a “wholly-owned subsidiary” of another company if it has no members except that

other and that other's wholly-owned subsidiaries or persons acting on behalf of that other or its

wholly-owned subsidiaries.

3. Schedule 6 contains provisions explaining expressions used in this section and otherwise

supplementing this section.

Neither section 1159(1)(a) or (b) were applicable in this instance. Enviroco attempted to rely on section

1159(1)(c).

Section 1159(1)(c) requires the parent to be a member of its subsidiary.

Section 112 addresses the members of a company. It provides:the subscribers of a company's

memorandum are deemed to have agreed to become members of the company, and on its

registration become members and must be entered as such in its register of members

2. every other person who agrees to become a member of a company, and whose name is entered in

its register of members, is a member of the company.

The difficulty for Enviroco was that shares formerly registered in the name of ASCO's parent had been

charged as security to a bank, resulting in the bank becoming the registered shareholder.

As a result, ASCO's parent was not a member of Enviroco, in terms of section 1159(1)(c). The Supreme

Court reached the decision that Enviroco was not an “affiliate” of ASCO.

In this case the Supreme Court applied a strict interpretation of the words of the charterparty agreement.

As statutory sections had been incorporated by reference to the contract, those sections had to be

applied as they stood. The Court could not re-write the contract for the parties. The Court specified three

factors relevant to departure from strict interpretation: first, where the wording flouts business

commonsense; secondly, where "something must have gone wrong with the language" and thirdly where

there was anything in the factual matrix to suggest that the words should have a different construction

than they would have had in the statutory context. The Court concluded that in this case none of these

factors justified interpreting the contract outside of its strict terms.

10

DRAFTING TIPS

Tip One

LOGIC “GROUP DEFINITIONS”

Definition of “company group”:

““COMPANY GROUP” means the COMPANY, its CO-VENTURERS, its and their respective AFFILIATES and its and

their respective directors, officers and employees (including agency personnel), but shall not include any

member of the CONTRACTOR GROUP.

Definition of “contractor group”:

““CONTRACTOR GROUP” means the CONTRACTOR, its SUBCONTRACTORS, its and their AFFILIATES, its and their

respective directors, officers and employees (including agency personnel), but shall not include any member of

the COMPANY GROUP. “CONTRACTOR GROUP” shall also mean subcontractors (of any tier) of a

SUBCONTRACTOR which are performing WORK offshore or at any wellsite, their AFFILIATES, their directors,

officers and employers (including agency personnel).”

Tip Two

LOGIC DEFINITION OF “AFFILIATE”

““AFFILIATE” means any subsidiary or parent or holding company of any company or any other subsidiary of

such parent or holding company. For the purpose of this definition, “subsidiary” and “holding company” shall

have the meanings assigned to them under Section 1159 and Schedule 6 of the Companies Act 2006, and a

company shall be treated, for the purposes only of the membership requirement contained in subsections

1159(1)(b) and (c), as a member of another company even if its shares in that other company are registered in

the name of (a) another person (or its nominee) whether by way of security or in connection with the taking of

security or (b) its nominee.”

Tip Three

LOGIC DEFINITION OF “SUBCONTRACTOR”

““SUBCONTRACTOR” means any party (other than the CONTRACTOR) to a SUBCONTRACT.”

Tip Four

LOGIC DEFINITION OF “CO-VENTURER”

““CO-VENTURER” means any other entity with whom the COMPANY is or may be from time to time a party to a

joint operating agreement or unitisation agreement or similar agreement relating to the operations for which

the WORK is being performed and the successors in interest of such CO-VENTURER or the assignees of any

interest of such CO-VENTURER.”

11

Tip Five

LOGIC “CONTRACTS (RIGHTS OF THIRD PARTIES) ACT CLAUSE”

“32. CONTRACTS (RIGHTS OF THIRD PARTIES) ACT

32.1 Subject to Clause 32.3, the PARTIES intend that no provision of the CONTRACT shall, by virtue of the

Contracts (Rights of Third Parties) Act 1999 (“the Act”) confer any benefit on, nor be enforceable by

any person who is not a PARTY to the CONTRACT.

32.2 For the purposes of this Clause 32, “Third Party” shall mean any member of the COMPANY GROUP

(other than the COMPANY) or CONTRACTOR GROUP (other than the CONTRACTOR).

32.3 Subject to the remaining provisions of the CONTRACT,

(a) Clause 17.7, Clause 17.8, Clause 19, Clause 20 and Clause 21 are intended to be enforceable

by a Third Party; and

(b) Clause 29.3 is intended to be enforceable by the AFFILIATES of the CONTRACTOR,

by virtue of the Act.

32.4 Notwithstanding Clause 32.3, the CONTRACT may be rescinded, amended or varied by the PARTIES to

the CONTRACT without notice to or the consent of any Third Party even if, as a result that Third Party’s

right to enforce a term of this CONTRACT may be varied or extinguished.

32.5 The rights of any Third Party under Clause 32.3 shall be subject to the following:-

(a) any claim, or reliance on any term of the CONTRACT by a Third Party shall be notified in

writing in accordance with the requirements of Clause 19.6 and Clause 29.6 by such Third

Party as soon as such Third Party becomes aware that an event is likely to give rise to such a

claim and such notification shall contain the following information as a minimum:

(i) details of the occurrence giving rise to the claim; and

(ii) the right relied upon by the Third Party under the CONTRACT;

(b) the provisions of Clause 31 shall apply in respect of any claim by a Third Party in that the

relevant parties agree to resolve any dispute between them in a prompt and amicable manner

by adopting the provisions of Clause 31; and

(c) the Third Party’s written agreement to submit irrevocably to the jurisdiction of the English

Courts in respect of all matters relating to such rights.

32.6 In enforcing any right to which it is entitled by virtue of the Act and the provisions of this CONTRACT,

the remedies of a Third Party shall be limited to damages.

32.7 A Third Party shall not be entitled to assign any benefit or right conferred on it under this CONTRACT

by virtue of the Act.”

12

PART 2 – TO “WHAT” DOES THE INDEMNITY APPLY?

LOOKING AT THE CONTRACT

Principles-To-Practice

Having established “Who” gives and receives the indemnity under the contract, the next question is – to

“What” does the indemnity apply? It is a common misconception that an indemnity is triggered and applies

upon the occurrence of a particular head of loss or damage, such as the “death of a person” or the “loss of or

damage to property”. An indemnity is not triggered by the occurrence of a head of loss; it is triggered by a

claim being made at law in respect of a head of loss.

As mentioned in the Background at the beginning of this paper, indemnities are a tool by which certain types of

loss arising at law in the context of a commercial relationship do not remain with the party which has the

liability at law; but instead such liability which exists, in the first instance at law for a loss, will be transferred to

a different party under the indemnity provisions of the contract.

Therefore, the loss itself is not the “What” to which the indemnity applies. The indemnity applies and is

triggered by a “claim” made at law in the first instance. An indemnity under the contract will only become

operative and applicable at the time a claim is made at law in respect of a head of loss (e.g. damage to

property). When liability arises at law in respect of such a claim, only then will the relevant indemnity be

triggered for the purpose of transferring such liability from the party that bears it at law to a different party to

which it is being allocated by contract.

In Looking at the Law below, we have considered two cases, in particular, which show the importance of

clearly and precisely describing, or defining “What” type of claim will be the trigger for an indemnity to apply.

Referring to relevant language from LOGIC model contracts as set forth in the “Drafting Tips” below, there is

not a definition of “claim”, but instead a description of “all claims, losses, damages, costs (including legal costs)

expenses and liabilities”.

As explained below in Looking at the Law, the opinion of the court appeal in Campbell v. Conoco (UK) Ltd & Ors

(2002) stressed the importance of descriptive language, or a definition including an express reference to

“liabilities”, as well as “losses, damages”. As mentioned in the case summary below, the party asserting a right

to receive the benefit of the indemnity had not actually incurred liability for the head of loss (e.g. personal

injury damages) at law, but had incurred liability under a back-to-back indemnity it had with the person that

suffered the loss at law in the first instance. The court concluded that the indemnity was triggered and it did

apply to the loss arising from a back-to-back indemnity obligation because the “claim” as a trigger for the

indemnity was broadly defined as including “liabilities” as well as “losses, damages”. If the relevant contract

had not defined, or described the trigger as including “liabilities”, the court’s opinion does clearly suggest that

a back-to-back indemnity obligation in respect of the personal injury damages may not have been covered by

the relevant indemnity.

In light of Campbell v. Conoco, and Wood v Capita Insurance Services Limited (2017), as also considered below

in Looking at the Law, it is apparent that there must be careful consideration of “What” constitutes a trigger

for the indemnity to apply. For example, if a “claim” as the trigger for an indemnity is defined in very narrow

language as a “cause of action, proceedings, judgement, award, costs (including reasonable legal fees)”, would

13

a claim at law that is settled prior to a formal cause of action being brought be recognised by a court as a basis

for the indemnity to be triggered and apply?

Also, comparing the pro forma definition of “Claim” in the “Drafting Tips” below to the description of the

trigger for indemnity in LOGIC, if there is not an express reference to “fines and penalties” as a trigger, would

an indemnified party be entitled to assert that a pollution indemnity, for example, is triggered when the loss

arising at law to which the indemnified party contends the indemnity should apply is in the form of “fines and

penalties” assessed by a relevant governmental authority in respect of the pollution event? Would the relevant

language from LOGIC be sufficient in this regard, or would a pro forma definition of “Claim” as shown below

with express reference to “fines and penalties” be required? There is no English case law that has considered

these questions. However, it is often important to proactively consider certain types of legal challenge that

could arise.

LOOKING AT THE LAW

As discussed above in Looking at the Contract, it is important that parties carefully consider the trigger for the

indemnity.

The Court in the case of Campbell v Conoco (UK) Ltd & Ors (2002), considered the trigger for an indemnity.

The Claimant, an employee of Salamis SGB Limited ("Salamis"), sustained serious injuries whilst working

on a North Sea Oil platform occupied by Conoco (UK) Ltd. ("Conoco"). The operator of the platform was

Britannia Operator Limited (“Britannia”). Britannia had entered into a contract with AMEC Process and

Energy Limited ("AMEC") for the commissioning of a platform. Britannia was acting under the contract as

agent "for and on behalf of" the co-venturers, which included Conoco. AMEC entered into a sub-contract

with Salamis for the provision of fire-proofing services associated with the commissioning.

The sub-contract was on a back to back basis with the main contract.

The Claimant's injury was caused when he was hit on the back by venting of compressed air from a diesel

line while he was working carrying out fire-proofing on the platform. The escape of compressed air was

not caused by the Claimant.

The indemnity clause in the sub-contract between AMEC and Salamis was as follows:

− "[Salamis] hereby agrees to indemnify and hold harmless [AMEC] against all liability for and all

claims arising in respect of any injury, death, sickness or ill health caused to or suffered by [Salamis]

and any Personnel as a result of or arising out of or in connection with the performance or non-

performance of the Contract regardless of the cause or reason therefor and regardless of the

negligence or breach of statutory duty of [AMEC] and against all costs, charges, expenses, damages

and proceedings incurred in connection with such claims or liabilities howsoever arising"

Salamis disputed liability on the basis that the indemnity clause only applied between AMEC and Conoco

and did not apply further down the contractual chain on a back to back basis. Salamis argued that the

phrase "all liability for, and all claims arising in respect of any injury" in the main contract covered liability

arising from an injury but could not include a claim under a contractual indemnity.

14

The Court of Appeal considered that when construing the indemnity in the context of the contract and in

particular, the use of the phrase “all liability for” the draftsman’s intention was to include back to back

claims. As such the Court concluded that the indemnity did extend to claims arising from a contractual

indemnity (i.e. back to back claims).

A recent example of the Court’s review of the trigger element of an indemnity clause was seen in the case of

Wood v Capita Insurance Services Limited (2017).

Capita Insurance Services Limited (“Capita”) entered into an agreement (“the SPA”) with Wood (“the

Respondent”) for the sale and purchase of the entire issued share capital of Sureterm Direct Limited (“the

Company”), a company which sold motor insurance.

After Capita purchased the Company’s share capital, employees of the Company raised concerns about

the Company’s sale processes. A Company investigation revealed that in many cases the Company’s

telephone operators had misled customers in order to make a sale. Capita and the Company informed the

Financial Services Authority (“FSA”). Capita and the Company agreed to pay compensation to customers

affected by the mis-selling. The FSA subsequently ordered the Company to pay over £1 million in

customer compensation.

Capita claimed under the indemnity in the SPA.

The indemnity provided: "all actions, proceedings, losses, claims, damages, costs, charges, expenses and

liabilities suffered or incurred, and all fines, compensation or remedial action or payments imposed on or

required to be made by [the target] following and arising out of claims or complaints registered with the

FSA .. . against [the target]... and which relate to the period prior to the Completion Date pertaining to

any mis-selling or suspected mis-selling of any insurance or insurance related product or service."

The seller disputed that the indemnity covered compensation and associated expenses following a self-

referral (as opposed to a claim/complaint being made by customers).

The High Court held that the clause required the Respondent to indemnify Capita even if there had been

no claim or complaint. The decision of the High Court was appealed.

The Court of Appeal reviewed issues of contractual interpretation. Lord Hodge described the process of

interpretation as "a unitary exercise; where there are rival meanings, the court can give weight to the

implications of rival constructions by reaching a view as to which construction is more consistent with

business common sense…This unitary exercise involves an iterative process by which each suggested

interpretation is checked against the provisions of the contract and its commercial consequences are

investigated…Some agreements may be successfully interpreted principally by textual analysis, for

example because of their sophistication and complexity and because they have been negotiated and

prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be

achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or

the absence of skilled professional assistance. But …There may often …be provisions in a detailed

professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions

may be particularly helped by considering the factual matrix and the purpose of similar provisions in

contracts of the same type".

15

The contractual context of the indemnity clause is relevant to interpretation. In this case, the mis-selling

which the indemnity clause addressed was also covered by the warranties schedule. The Court assessed

the indemnity clause in the context of the time-limited warranties in the warranties schedule. These

warranties provided that Capita had two years after completing the purchase to claim under the

warranties schedule.

The Court of Appeal was of the opinion that it was not contrary to business common sense for the parties

to agree wide-ranging warranties, which are subject to a time limit, and to agree a further indemnity,

which is not subject to any such limit but is triggered in limited circumstances. The warranties supported

a narrow interpretation of the indemnity clause.

Lord Hodge concluded that: “From Capita’s standpoint the SPA may have become a poor bargain… But it

is not the function of the court to improve their bargain”. Accordingly, the Supreme Court found in favour

of the seller and held that the indemnity clause had not been triggered.

Wording such as ‘any losses arising out of or in connection with a claim’ is wide and is likely to facilitate greater

liability than an indemnity that is only triggered, for example, when a court of competent jurisdiction

pronounces judgement in relation to the indemnified claim. Parties with the benefit of an indemnity should

resist agreeing to an indemnity that is only triggered by a judgment from which there is no right of appeal. To

agree to such an indemnity could require a party to appeal a decision all the way to the Supreme Court. Care

should also be taken to look at how other clauses within the contract may impact on interpretation of the

indemnity clause. Like any other clause in a contract, the indemnity clause is construed as part of the contract

as a whole and therefore with reference to the other clauses in the contract.

DRAFTING TIPS

Tip One

LOGIC PRO FORMA LANGUAGE DESCRIBING THE TRIGGER FOR INDEMNITY

“The CONTRACTOR shall be responsible for and shall save, indemnify, defend and hold harmless the COMPANY

GROUP from all claims, losses, damages, costs (including legal costs) expenses and liabilities…”

Tip Two

PRO FORMA DEFINITION OF “CLAIM” AS TRIGGER FOR INDEMNITY

““CLAIM(S)” shall mean any claim of every kind and nature, demand, cause of action, proceedings, judgement,

award, costs (including reasonable legal fees), liability, loss, expense, penalty, fine and damages.”

16

PART 3 – “WHERE” DOES THE INDEMNITY APPLY?

LOOKING AT THE CONTRACT

Principles-To-Practice

Recognising that a “claim at law” is “What” triggers the indemnity, the next question is “Where” does the

indemnity apply after it is triggered? The answer, stated simply, is that the indemnity will always apply to

“Where” the particular head of loss exists. If a claim at law triggers an indemnity, such indemnity will apply, for

example, “Where” the relevant claim involves “loss or damage to property”, “Where” it involves “loss in

respect of personal injury or death”, or “Where” it involves “pollution”.

The types of loss “Where” an indemnity will apply are not the same in every oil and gas service contract.

Referring to the entire suite of LOGIC contracts, it is clear that the indemnity regime in LOGIC MODU 97 Ed.1,

for example, applies to more types of loss than, by contrast, Marine Construction Ed.2. From a practical

perspective, this paper will not attempt to identify all types of loss that may be relevant to various types of

contracts, LOGIC or otherwise, nor will it attempt to provide any level of a comparative analysis of the extent

of variance across various types of contracts. The primary purpose of this paper is not to provide any particular

risk management perspective on what types of loss should be considered by the parties to a contract as

commercially acceptable for allocation under an indemnity regime.

The common thread of this paper is to provide a practical perspective on best practices by which an in-house

practitioner can:

(i) understand the risk management requirements of an organisation (whether operator or

contractor),

(ii) evaluate how those requirements may, in principle, best be met under a relevant indemnity

regime, and

(iii) apply a structured and systematic approach for drafting an indemnity regime that aligns with

those requirements and operates effectively to achieve the risk management objectives.

17

From a practical perspective, the creation of a “risk matrix” is one effective method for accurately identifying

each of the types of loss to which the relevant indemnity regime of a particular contract should apply. This

matrix will, of course, vary from contract-to-contract. For example, a pro forma “Risk Matrix” for a typical

dayrate drilling contract may be reflected in the following form.

Elements of Liability Risk Contractor

Giving

Contractor Group

Receiving

Company Giving

Company Group

Receiving

Contractor Group’s Property and Personnel X X

Company Group’s Property and Personnel X X

Loss of Hole X X

Pollution/Contamination originating above the water line

X X

Pollution/Contamination not related to blow out emanating below the water line

X X

Pollution/Contamination emanating from or associated with a blow out

X X

All other loss related to a blow out X X

Underground/Reservoir damage X X

Down hole tools and equipment of a subsea nature (subject to agreed depreciation)

X X

Consequential Loss X X X X

Proximate Third Party Infrastructure Damage

X X

Third Party Injury, Death or Property Damage (to the extent of indemnitor’s negligence)

X X X X

Whatever the types of loss that may be relevant to an indemnity regime for a particular contract and however

those types of loss are ultimately identified (either by matrix approach or by any other means), the point of

practice of overriding importance for any in-house practitioner and, likewise, the focal point of this part of the

paper is that the language used in an indemnity regime for describing any particular type of loss must be

carefully considered and precisely drafted. We have referred to a number of examples in the following

paragraphs to most effectively stress this point.

18

Scenario of drafting an indemnity for claims in respect of the head of loss of “injury or death”

Referring to Clauses 18.1(b) and 18.2(b) of LOGIC MODU 97 Ed.1, the text “personal injury including death or

disease to any person employed by the CONTRACTOR GROUP (under 18.1(b)) or employed by COMPANY GROUP

(under 18.2(b))” has been adopted to describe the relevant head of loss for which a claim at law would be

brought and to which the indemnity would apply. The relevant language of “personal injury including death or

disease” features consistently throughout the entire suite of LOGIC model contracts. This language has been

broadly recognised as sound drafting practice. It has certainly not been challenged under English law as

ineffective in any way for covering all types of claims that could arise under this particular head of loss.

If, however, the above language were revised, for example, to read “bodily injury including death” (i.e. with

“personal” changed to “bodily” and “disease” omitted), could that have any potential implications in respect of

the effectiveness and enforceability of the relevant indemnity? It may be argued that it could. If a type of claim

that could potentially arise under this head is for loss attributable to a condition of mesothelioma due to

asbestos exposure on a drilling unit, would the language “bodily injury”, standing alone, be sufficiently broad to

cover this type of claim. It could be argued that it may not be and that the inclusion of the word “disease”

would be critical, from a drafting perspective, to ensure that the indemnity would apply.

Scenario of drafting an indemnity for claims in respect of the head of “damage to well”

Referring to Clause 18.6(a) of LOGIC MODU 97 Ed.1, the text “loss of or damage to any well or hole” has been

adopted to describe the relevant head of loss for which a claim at law would be brought and to which the

operator’s indemnity would apply in favour of the drilling contractor. Again, this language has been broadly

recognised as sound drafting practice for the purpose of covering all types of claims that could arise under this

particular head of loss.

If, however, the above language were revised, for example, to read “the WELL” and if “WELL” had been defined

as one or more of the wells being drilled for the scope of work under the contract, could that have any

potential implications in respect of the effectiveness and enforceability of the relevant indemnity? It may be

argued that it could. What if a type of claim that could potentially arise under this head is for loss attributable

to an underground blow out of a WELL, as defined, which migrates to, and damages another well (owned by a

different joint venture) and not, of course, included in the scope of work for the contract. In that event, the

claim for loss in respect of the “well” would presumably not be covered by the indemnity.

Scenario of drafting an indemnity for claims in respect of the head of “blowout”

Referring to Clause 18.6(b) of LOGIC MODU 97 Ed.1, the text “blowout, fire, explosion, cratering or any

uncontrolled well condition (including without limitation the costs to control a well and the removal of debris)

has been adopted to describe the relevant head of loss for which a claim at law would be brought and to which

the operator’s indemnity would apply in favour of the drilling contractor. Again, this language has been broadly

recognised as sound drafting practice for the purpose of covering all types of claims that could arise under this

particular head of loss.

If, however, the above language were revised, for example, to omit the language “(including without limitation

the costs to control a well and the removal of debris)” could that have any potential implications in respect of

the effectiveness and enforceability of the relevant indemnity? Again, it may be argued that it could. As

19

evidenced by aerial photographs of the Macondo well site in the immediate wake of the disaster, a vast

armada of vessels had been mobilised, and a vast scale of other resources and logistics were deployed, at

significant cost, over a protracted period of many months to bring the well under control. In the absence of

language specifically referring to the “costs to control a well”, it is arguable that any attempt to enforce an

indemnity in respect of these types of costs on the basis of only the language “blowout, fire, explosion,

cratering or any uncontrolled well condition” could be challenged as not covered.

LOOKING AT THE LAW

It is important to ensure that the wording of the indemnity covers the types of losses that the parties have

agreed will be covered. It is common for the indemnity to apply to various different types of loss. When

interpreting lists the Court may apply the ejusdem generis rule. If all the items listed are of one kind, the

general words may be interpreted as limited to things of the same kind.

In the case of Transocean Drilling v Providence Resources (2016) the owner of an oil rig contracted with

another company for the drilling of an oil well. The contract was based on the LOGIC MODU 97 model contract.

Providence sought to recover ‘spread costs’ and the court had to decide whether the loss claimed was covered

by the indemnity, and therefore excluded, by the contract.

The provision excluded recovery by either party of liability for consequential loss (as defined) as follows:

“(i) …any indirect or consequential loss or damages under English law, and/or

(ii) to the extent not covered by (i) above, loss or deferment of production, loss of product, loss of

use (including, without limitation, loss of use or the cost of loss of use of property, equipment,

materials and services including, without limitation, those provided by contractors or subcontractors

of every tier or by third parties), loss of business and business interruption, loss of revenue… loss of

profit or anticipated profit, loss and/or deferral of drilling rights and/or loss, restriction or forfeiture of

licence, concession or field interests, whether or not such losses were foreseeable at the time of

entering the contract…”.

The Court found that the words “loss of use (including, without limitation, loss of use or the cost of loss of

use of property, equipment, materials and services including, without limitation, those provided by

contractors or subcontractors of every tier or by third parties)” were “plainly apt” to include the spread

costs claimed and as such liability was excluded.

The court was also assisted by the fact that the parties had emphasised the intended width of the clause

by their inclusion, twice, of the phrase “without limitation”. This phrase is often used to counteract the

ejusdem generis principle.

20

PART 4 – “WHEN” DOES THE INDEMNITY APPLY?

LOOKING AT THE CONTRACT

Principles-To-Practice

The fourth question is “When” does the indemnity apply? The answer, again simply stated, is that it will apply

“When”, for example, the relevant claim and head of loss is “arising from or related to the performance of the

CONTRACT”. The foregoing language is extracted from LOGIC and the full text, as it appears in each relevant

indemnity in LOGIC, is shown in the “Drafting Tips” below.

In the same way that an in-house practitioner must carefully consider and precisely draft the language

describing the “head of loss” for an indemnity, the same careful consideration should apply to the drafting of

“When” language. The significance is perhaps best illustrated by referring to an example of a claim for a

personal injury head of loss.

In this scenario, an individual had trapped a limb in a tool being used to perform the “WORK”. The relevant

indemnity for the head of loss is drafted to apply “When” the injury “arises out of the WORK”. In this case, the

injury has clearly arisen out of the WORK itself and the indemnity would, in that event, apply. However,

consider whether the same indemnity would apply if the individual trapped a limb in a door when moving

around the accommodation module of an installation when not on shift; could such an injury be said to “arise

out of the WORK”? In Smith v South Wales Switchgear [1978] 1 WLR 165, Lord Keith said no. The indemnity in

that case was drafted to apply only where the injury was suffered during the “execution of the Order”. The

court held that the indemnity would only apply to an injury occurring as a result of doing the contractual work.

If, in the above scenario, the relevant language had read “arising from, related to or in connection with” would

the injury that occurred in the accommodation module be covered by the indemnity? As explained in detail

below in the Looking at the Law, the Court reached a different conclusion.

LOOKING AT THE LAW

As discussed above, it is important to establish the connection between the trigger and the loss i.e. the nexus.

In the case of Campbell v Conoco (UK) Ltd & Ors (2002), the Court of Appeal also considered this question.

The facts of Campbell v Conoco have been narrated already.

The Court of Appeal was also required to consider the words of the indemnity ("as a result of, arising out

of or in connection with") in the context of the nexus. The Court opined that the words used were very

wide and that the words "in connection with" were as wide a nexus as could be drafted.

The Court debated whether the words "performance or non-performance of the contract" indicated the

need for a connection with the contractual work to be carried out.

21

The Court observed that the word “Contract” was not defined but the word “Works” was defined and the

Court was of the opinion that the word “Works” could easily have been used instead of the word

“Contract”.

The Court concluded that the injury suffered by Mr Campbell was "in connection with the performance or

non-performance of the contract" notwithstanding that the escape of compressed air causing Mr

Campbell's injury was not related to the contractual work being carried out by him.

Lord Justice Rix, observed “I do not need to consider for the purpose of this appeal whether, if Mr

Campbell had been injured while he was asleep in his bunk on the oil platform or otherwise relaxing,

enjoying his leisure hours, that would have been within the connecting link factors of the clause. For the

facts of the case are that Mr Campbell was at work on the sub-contract at the time of his injury. But it

may well be that that would have been within the clause.” As such it seems that in circumstances where

Mr Campbell was not even working, the clause was drafted so widely that sleeping or relaxing would have

fallen within the nexus of the clause. This is consistent with the obiter comments made in EE Caledonia

Ltd v. Orbit Valve Co PLC (1995) by Lord Justice Steyn, who observed, “It does not matter that he was off

duty when the explosion and fire occurred. He had to live on the platform while doing the work. When

the explosions and fire occurred Mr. Quinn was in every relevant sense of the word on board the platform

“in connection with” the performance of the order.”

DRAFTING TIPS

LOGIC suite of contracts predating the Campbell v Conoco case read as follows:

“arising from or relating to the performance of the CONTRACT”.

Following the above decision, later editions adopt the following language:

“arising from, relating to or in connection with the performance or non-performance of the CONTRACT”.

22

PART 5 – “HOW” DOES THE INDEMNITY APPLY?

LOOKING AT THE CONTRACT

Principles-To-Practice

The fifth question is “How” does the indemnity apply? The answer is – where reciprocal indemnities are

exchanged between the parties for claims in respect of personal injury or death and loss or damage to

property, such indemnities will typically apply “irrespective of cause and notwithstanding the negligence or

breach of duty (whether statutory or otherwise) of the indemnified [party] or any other entity or party and shall

apply irrespective of any claim in tort, under contract or otherwise at law.” The foregoing language is extracted

from LOGIC and the full text, as it appears in each relevant indemnity in LOGIC, is shown in the “Drafting Tips”

below.

In Looking at the Law below, we have considered a number of seminal cases under English law that provide a

context for considering the relevant principles and points of best practice for drafting a fully enforceable

indemnity regime. As explained in more detail in Looking at the Law, many of the relevant cases provide clear

insight into the challenges faced by parties to a contract when drafting indemnities that purport to apply in

favour of an indemnified party even in the event the relevant head of loss to which the claim applies is

attributable to the negligence of the indemnitee. The above LOGIC language is broadly recognised as

sufficiently robust to meet most of these challenges.

However, from a drafting perspective one final point that must be considered, in addition to the LOGIC

language, is the concept of gross negligence and wilful misconduct. A more detailed consideration of what

“gross negligence” means under English law is provided below in Looking at the Law. From a practical

perspective, it is important to recognise that, if the concept of gross negligence is adopted in a contract

governed by English law, it will always be best practice for the parties to clearly define what it means. As

explained in Looking at the Law, the concept of gross negligence has historically neither been widely

recognised nor well understood under English law.

Referring to the above “How” language from LOGIC, oil and gas service contracts have not historically made

express reference to wilful misconduct. Commentary is divided on whether an express reference to negligence

will be construed as including wilful misconduct. Although a settled view on best drafting practice is not clear,

wilful misconduct carve-outs are becoming increasingly common in a post-Macondo environment. As

explained in Looking at the Law below, although wilful misconduct is recognised under English law, it will

always be best practice to define precisely what it means.

LOOKING AT THE LAW

As discussed in Looking at the Contract the Courts have in the past had difficulty in accepting a position

whereby a party to a contract intends to fully absolve the other party of liability. However, the industry

practice of mutual offshore indemnities was clearly accepted in Caledonia North Sea Limited v. London Bridge

(2002).

In Canada Steamship (1952) the Court set down a three-stage test to guide the interpretation of clauses

purporting to exclude liability for negligence altogether. These are;"(1) If the clause contains language which

23

expressly exempts the [defendant] from the consequence of the negligence of his own servants, effect must be

given to that provision...(2) If there is no express reference to negligence, the court must consider whether the

words used are wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the

[defendant]. If a doubt arises at this point, it must be resolved against the [defendant]...(3) If the words used

are wide enough for the above purpose, the court must then consider whether 'the head of damage may be

based on some ground other than that of negligence' The 'other ground' must not be so fanciful or remote that

the [defendant] cannot be supposed to have desired protection against it; but subject to this qualification ...

the existence of a possible head of damage other than that of negligence is fatal to the [defendant] even if the

words used are prima facie wide enough to cover negligence on the part of his servants." This guidance was

approved by the House of Lords in HIH Casualty and General Insurance Ltd v Chase Manhattan Bank (2003).

However, the guidance in Canada Steamship (1952) should be viewed as guidance and read in conjunction

with the ordinary rules on contract interpretation.

When looking at the “how” in an indemnity clause “howsoever caused” does not necessarily cover all causes.

One question that often arises with indemnities is whether or not an indemnity clause can operate to cover

parties’ own negligence or default. In the Scottish case of Caledonia North Sea Limited v. London Bridge

(2002) the House of Lords considered this issue.

Caledonian North Sea (“Caledonia”) operated the Piper Alpha oil platform on behalf of a number of

companies. 37 of the 226 people working on the platform were employed by Caledonia; the remaining

189 were employees of a number of contractors. The disaster on 6 July 1988 killed 165 and injured 61.

Investigations showed that the initial explosion was caused by the negligence of two people - an

employee of a valve contractor and an employee of Caledonia.

Caledonia and its insurers settled all claims in respect of those killed or injured. The insurers then sought

to recover under the indemnity from the valve contractor in respect of payments relating to the

contractors' employees.

Caledonia had entered into similar contracts with each of the contractors. The indemnity provision

provided:

− "15 (1) Contractor's Indemnities

Contractor shall indemnify, hold harmless and defend the company and its parent, subsidiary and

affiliate corporations and Participants, and their respective officers, employees, agents and

representatives from and against and all suits, actions, legal or administrative proceedings, claims,

demands, damages, liabilities, interest, costs (including but not limited to the cost of litigation) and

expenses of whatsoever kind or nature whether arising before or after completion of the work

hereunder and in any manner directly or indirectly caused, occasioned or contributed to in whole or

in part, by reason of omission or negligence whether active or passive of contractor, or of anyone

acting under contractor's direction, control or on contractor's behalf in connection with or incidental

to the work. Provided always that the contractor's total liability arising pursuant to this indemnity

shall not exceed one million pounds sterling (£1,000,000) per occurrence.

24

Without prejudice to the foregoing generality, the contractor shall indemnify, hold harmless and

defend the company and its parent, subsidiary and affiliate corporations and participants, and their

respective officers, employees, agents and representatives from and against any claim, demand,

cause of action, loss, expense or liability (including but not limited to the cost of litigation) arising

(whether before or after completion of the work hereunder) by reason of:

........

(c) Injury to employees and damage to property of contractor

Injury to or death of persons employed by or damage to or loss or destruction of property of the

contractor or its parent, subsidiary or affiliate corporations, or the contractor's agents, sub-

contractors or suppliers, irrespective of any contributory negligence, whether active or passive, of

the party to be indemnified, unless such injury, death, damage, loss or destruction was caused by

the sole negligence or wilful misconduct of the party which would otherwise be indemnified;

.................

− Clause 15(2) contained similar indemnities from the operator in favour of the contractor.

The contractor argued that the wording following "without prejudice to the foregoing generality" in

Clause 15(1) demonstrated that the subsequent sub-clauses (including 15(1)(c)) were simply examples of

what the contractor was liable for under the first paragraph. The contractor argued that the wording of

the indemnity was such that it would only be liable where the loss was caused by its own negligence. The

Court disagreed with this argument and emphasised that the words "without prejudice to the foregoing

generality" instead meant that provisions in the clause following the phrase were not meant to exclude

any claim falling under the first paragraph.

The contractor argued that, as Clause 15(1)(c) also referred to "contributory negligence", this again

demonstrated that in order for the clause to make sense there would need to be negligence or breach of

statutory duty on the part of the contractor. However, the Court was clear that this did not prevent it

being used, as in this case, to refer to negligence contributing to the cause of the accident, as opposed to

negligence which was the sole cause of the accident.

The Court held that the indemnity clause in the contract was clear and unambiguous. Insofar as where the

injury, death, damage, loss or destruction was not caused by the sole negligence of the operator, the

contractors were liable to indemnify the operator.

Lord Mackay emphasised the contra preferentum rule, that ambiguous drafting would be construed

against the party seeking to rely on it and therefore had there been ambiguities in Clause 15(1) these

would have been construed against the operator.

In the case of EE Caledonia Ltd v. Orbit Valve Co PLC (1995), also arising from the Piper Alpha disaster, the

Court again considered whether an indemnity clause could operate to cover the risk of negligence or default

caused by parties’ sole fault. The indemnity clause in this case was drafted differently from the indemnity

provision in the case of London Bridge and the Court reached a different conclusion.

25

EE Caledonia Ltd (“Caledonia”) operated the Piper Alpha Platform (the company changed its name to

Caledonia North Sea Limited in 1991). As stated, Investigations showed that the initial explosion was

caused by the negligence of two people - an employee of a valve contractor (“Orbit Valve”) and an

employee of Caledonia.

Caledonia settled a claim for the death of an employee of Orbit Valve and sought to claim reimbursement

from Orbit under an indemnity clause.

The indemnity clause provided:

− “(a) Non compliance with laws. The contractor shall comply, and cause its employees to comply with

all laws, ordinances, rules, regulations and orders directly or indirectly applicable to the work,

including but not limited to the labour employed on the work, the safety and security of the work, and

the preservation and public health and safety. The contractor shall indemnify and hold harmless the

company and its affiliates against all liability arising from non-compliance with any such provisions.

(b) Company's and contractor's employees and property. Each party hereto shall indemnify, defend

and hold harmless the other, provided that the other party has acted in good faith, from and against

any claim, demand, cause of action, loss, expense or liability (including the cost of litigation) arising by

reason of any injury to or death of an employee, or damage, loss or destruction of any property, of the

indemnifying party, resulting from or in any way connected with the performance of this order.

(c) Third party employees and property. The contractor shall indemnify, defend and hold harmless the

company, provided that the company has acted in good faith, from and against any claim, demand,

cause of action, loss, expense or liability (including the cost of litigation) arising by reason of any

injury, death, property damage, loss or destruction (other than such as is the subject of a company

indemnity to contractor under article 10(b) above) resulting from or in any way connected with the

performance of this order, except that the contractors indemnity pursuant to this article 10(c) shall

apply only up to an amount of £500,000 per occurrence.”

The indemnity clause did not contain express provision that it would apply even if the loss in question was

caused as a result of a party’s own negligence.

The Court of Appeal observed that there was a “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".

On this basis, the Court rejected EE Caledonia's claim as the death was caused by its own negligence.

The Court also considered whether the relevant clause included an indemnity for breach of statutory duty

as opposed to negligence. The Court held that the clause should be construed as providing that the

indemnities are not applicable if the event in question had been caused by a party's breach of statutory

duty.

As such, when looking to include an indemnity for loss caused by parties’ own negligence this should be

expressly provided for.

It is common for an indemnity clause to include carve outs. Most often the carve-out will cover "wilful

misconduct" and/or "gross negligence". The first problem is that parties often use these terms without defining

26

them. Neither Scots or English law have a clear definition of wilful misconduct, beyond that it involves knowing

or not caring that the act is wrong under the contract.

In Forder v Great Western Railway Co (1905) the Court observed that wilful misconduct involved a "knowingly

wrongful action or a failure to act or acting with reckless carelessness, not caring what the results of the

carelessness may be." In TNT Global -v- Denfleet International (2007) the Court of Appeal stated that “wilful

misconduct was more than negligent misjudgement”, and "either an intention to do something which the actor

knows to be wrong or a reckless act in a sense that the actor is aware that loss may result from this act and yet

does not care whether loss will result or not." In De Beers (UK) v ATOS Origin IT Services (2010) the Court said

that "conduct by a person who knows that he is committing and intends to commit a breach of duty or is

reckless in the sense of not caring whether or not he commits that breach" amounted to wilful misconduct.

There is less clarity with the definition of gross negligence. It is unclear whether English law recognises gross

negligence as a separate category from simple negligence. However, there have been attempts to create a

level of negligence beyond that ordinary negligence. The Court in Camatra Property Inc v Credit Suisse

Securities (2011) described gross negligence as "more negligent than ordinary negligence".

Fraud is recognised as “a thing apart”. In the case of HIH Casualty & General Insurance (2003) the Court stated

“Parties entering into a commercial contract will no doubt recognise and accept the risk of errors and

omissions in the preceding negotiations, even negligent errors and omissions. But each party will assume the

honesty and good faith of the other; absent such an assumption they would not deal.”

A final question when examining the “How” is whether the Courts will allow indemnity provisions to cover a

significant breach of contract or a complete failure to perform. In the case of Turtle Offshore SA v Superior

Trading Inc (2008) the Court upheld an indemnity notwithstanding a breach of contract which resulted in the

complete loss of a vessel.

The indemnity provided “The following shall be for the sole account of the Hirer without any recourse to

the Tugowner, his servants or agents, whether or not the same is 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 or sustained by the Tow…

(iii) Loss or damage of whatsoever nature suffered by the Hirer . . . in consequence of the loss or

damage referred to in (i) . . . above.”

On the facts, the Court held that the tug owners were in breach and negligent, but were exempted from

liability due to the wording of the indemnity clause.

The Court observed that “Had it been intended that the tug owners were not responsible for loss, damage

and liabilities (of the categories listed in clause 18) occurring after the tug owner had chosen not to

perform the towage contract by, for example, releasing the towage connection in order to perform a

more profitable contract, then very clear words would be required because that would be a very radical

breach indeed.”

The reasoning in the case of Kudos Catering (2013) where the contract contained a comprehensive unilateral

indemnity and waiver of liability is worth considering. The indemnity was stated to apply "in any circumstances

and in any way arising". The party with the benefit of this indemnity terminated the contract and refused

27

further performance of it. The Court of Appeal stated that the operation of the indemnity clause "pre-supposes

defective performance of the contract but not a refusal to perform it or be bound by it". On the basis that the

contract had been terminated, the Court refused to uphold the indemnity. These cases illustrate how the Court

will distinguish between defective performance and refusal to perform.

DRAFTING TIPS

PRO FORMA “HOW” LANGUAGE FROM LOGIC

“All exclusions and indemnities given under this Clause (save for those under Clauses 19.1(c) and 19.2(c)) and

Clause 21 shall apply irrespective of cause and notwithstanding the negligence or breach of duty (whether

statutory or otherwise) of the indemnified [party]* or any other entity or party and shall apply irrespective of

any claim in tort, under contract or otherwise at law.”

*typo in LOGIC contract amended.

CONCLUSION

In summary, an indemnity regime in a typical oil and gas contract will often have a complex structure and

complicated language. However there are certain tools that can be considered for a structured and systematic

approach to dissecting and deciphering an indemnity regime. If you start with simple steps, such as the five

questions, the process of drafting can be more manageable and any contentious negotiation can become more

constructive.