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Offshore Contracts. Knock-for-Knock Regime - Series 1



Avoiding any complexities with offshore contracts, which usually arise from loss of life, injuries, and property damage, the parties agree to accept losses to their property and own personnel, regardless of the blame. An example may be given with the Piper Alpha disaster where claims were made against 24 different contractors and many more subcontractors. Therefore, to avoid such complication, parties agree to accept their property losses under the knock-for-knock regime.

The knock for knock clauses in the offshore contracts exists for the apportioned risk related to losses arisen as a matter of accident or negligence, which are supported by mutual indemnities. 

In the way where ''loss lies where it falls,'' the fault-based clauses are replaced by knock-for-knock clauses. The Knock-for-knock regime is an alternative way to allocate the risk between involved parties in the offshore contracts within the oil & gas and renewables sectors. 

Knock-for-knock clauses bring certainty and clarity in the contract for the benefit of the parties and their insurers, as well as fewer possibilities for dispute between parties as there are established liability. 

The below characteristics are attributable to the knock-for-knock regime, which is usually existing in offshore contracts as LOGIC or BIMCO and many others.

- Based on mutual agreement between parties, each party accepts its Liabilities and losses to its property. 

- Where the contracting party subcontractors suffer losses, the scope of work will be extended to capture the same.

- The above will capture depending on who and what is covered, what sort of property is covered if any and when claims can be carried out. 

- These will be declared regardless of the cause of the loss, the frequency and the party's non-performance or breach of responsibility. 

There are certain legal and commercial advantages for the Knock-for-knock regime, which reduces contract disruption and time delays in the ways below;

There is no need for lengthily and costly investigation

- Decrease the scope for dispute between parties, should such arises. 

It appears that the knock-for knock clauses give peace of mind to parties, as well as insurers generally support the regime. This avoids sharing the insurance coverage between parties, which give them options for receiving high level and more feasible insurance coverage. 

Nevertheless, the knock-for-knock regime is not without challenges for the offshore industry, and in particular when drafting the clauses. All parties related to each other with owners, contractors and subcontractors create a ''big family'' operating under a joint venture and/or under a parent company. This ''family'' of contractors and subcontractors will encompass everyone, however, if the offshore wind farm contractor is an EPC, then this might be problematic, as it won't be captured under the ''family group''. Then the EPC contractor might seek for own insurance coverage and indemnity. 

Another potentially problematic area might be seen in the nuance between gross negligence or wilful misconduct, as this must be clearly shown in the contract, and if the knock-for-knock regime should apply for these. Most of the time it can be found that the wilful misconduct has a bugger threshold than the gross negligence in the offshore contracts and offshore wind farm contracts, which is not unusual. 

In addiiton, in reducing and avoiding disputes related to offshore contracts, properly drafted knock-for-knock clauses are needed with comprehensive insurance cover, which inevitably will decrease arguing at a letter phase who and why something has been done. Enough knowledge and experience are needed in the offshore industry for parties involved so they get the project feasibility of the knock-for-knock regime, however, careful consideration is to be done when drafting such clauses, as it does affect the finalised contract and compensates in a long run. 

 

Veselin Shivachev 

Vedera Consulting 







info@vedera-ccm.com
+44 (0) 2381941164

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