Offshore Floating Production
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CHAPTER 8
Indemnity and limitation of liability clauses
A Introduction
8.1 There are no standard form FPSO contracts or indemnity clauses. Further, there are no universally adopted indemnity clauses used in the oil and gas industry. However, the LOGIC (Leading Oil & Gas Industry Competitiveness, set up in 1999 by the UK Oil and Gas Industry Task Force, previously known as CRINE) contracts were initially developed in 1997 in order to provide standard wordings for use (often on construction projects) in the North Sea. These were developed and supported by major operators such as Shell, BP and Total and leading contractors such as Technip, AMEC and Wood Group. To some extent they continue to be used and, even where not used as a basis for the contract, they continue to provide a useful reference point for offshore projects worldwide. The LOGIC contracts therefore provide a useful reference point for considering the indemnity and limitation of liability clauses that one finds in FPSO contracts. 8.2 A key characteristic of risk allocation in offshore contracts is that it is based on a ‘no fault’ regime where, contrary to the ordinary legal position, loss is allocated not in accordance with the party responsible or at fault for the loss but, rather, with the party that suffered the loss. 8.3 This may be considered to be counter-intuitive and can give rise to results which can be criticised for being unjust. For instance, if the FP Contractor negligently injures the employee of the Company, many would think that the FP Contractor should compensate the injured employee rather than the innocent Company. Under an indemnity clause, however, such liability is typically the responsibility of the Company and the FP Contractor would normally be entitled to a full indemnity in respect of its own exposure to such liability. 8.4 FPSO charters often allocate risks in a manner that is consistent with other offshore contracts, i.e. adopting a no fault regime. FPSO charters commonly allocate the following risks, which are considered in more detail in this chapter:- 1. Personal injury/loss of life;
- 2. Property damage to the Contractor Group’s and the Company Group’s property;
- 3. Property damage to third-party property and personal injury to third parties;
- 4. Pollution;
- 5. Consequential losses; and
- 6. Liability for wreck removal.1
B
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Risk of personal injury/loss of life
8.5 Each party to a FPSO charter typically accepts the risk of personal injury and loss of life to its employees and that of its group, and provides an indemnity to the other party in respect of such risks. Such indemnity clauses do not seek to exclude either party’s liability to the injured employee. The employee (who is not a party to the contract) remains able to bring a claim against the FP Contractor, the Company or, indeed, any other person or entity that the injured employee considers is responsible for the injury. As between the Company and the FP Contractor, each is required to take responsibility for and indemnify the other in respect of any liability that exists for their and their group’s employees. This would commonly involve the relevant employer seeking to negotiate the settlement of the injured employees’ claim, possibly in conjunction with its insurance company that has agreed to provide indemnity in respect of such loss (i.e. the relevant liability insurer or P&I club).
8.6 In practice, the following issues can arise:
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- 1. It is common for parties to propose indemnity clauses that are not reciprocal, such that the party who prepared the first draft of the charter (often the oil company inviting tenders) may seek an indemnity from the FP Contractor but may not offer one in return or not offer one that is equally balanced;
- 2. Even if, on its face, the clause appears to be reciprocal, the definitions of ‘Company Group’ and ‘Contractor Group’ are not always well balanced. The Contractor Group definition is often drafted broadly to include its subcontractors and their subcontractors of any tier. The indemnity being sought from the FP Contractor can, therefore, be very broad. The indemnity being provided by the Company often does not extend to its subcontractors (let alone subcontracts of any tier);
- 3. The preceding approach does not only mean that the indemnities are not well balanced. The FP Contractor is faced with negotiating to contract with its sub-contractors on back-to-back terms and also absorbing additional risk if the subcontractors are not sufficiently creditworthy (given any indemnity from the subcontractor is only as good as the subcontractor’s balance sheet and insurance arrangements). Not all subcontractors of any tier will be prepared to enter into indemnity clauses that are entirely back-to-back with those being sought by the Company from the FP Contractor. This can leave the FP Contractor being required to indemnify the Company, but unable to recover from the relevant subcontractor;
- 4. Parties also need to give consideration to who falls outside of the definition of Company Group and Contractor Group and who might therefore be treated differently. The risk allocation in relation to third parties is considered in Section D.
C Property damage
8.7 Each party to an offshore construction contract typically accepts the risk of physical loss of or damage to its property and that of its group and provides an indemnity to the other party in respect of such risk. 8.8Page 134
D Third-party property damage and personal injury/loss of life
8.11 A third party’s claim for property damage or personal injury will typically be subject to the local law where the incident occurred and the local courts are likely to accept jurisdiction, irrespective of what is stated in the offshore contracts. 8.12 For example, a third-party pipeline owner whose pipeline is damaged by the dragging of an anchor may choose to bring a claim against the FP Contractor and/or the Company and possibly others involved in the project such as the owner of the tug contracted in for the works. The merits of that claim will be considered under local law. Many legal systems, including England and Wales, apply rules of law based on fault. If the defendant has acted negligently and caused loss to the claimant, the defendant will be held liable for that loss in the tort of negligence (or equivalent in other legal jurisdictions). 8.13 The purpose of the indemnity clauses in the commercial contract is not to exclude either party’s liability to the third party but, rather, to allocate the loss between the parties. The indemnity clauses will be interpreted in accordance with the law governing the contract and will be subject to the dispute resolution mechanism specified in the contract (e.g. arbitration in London, whether or not governed by a specific arbitral body’s rules). 8.14 It is common for FPSO charters to provide for ‘guilty party pays’ reciprocal indemnities such that the responsible party pays to the extent of its negligence. An example clause would be: