Advice for Start-ups Part 4: What is Wilful Misconduct?

“Wilful Misconduct” / “Gross Negligence” are terms regularly used in contracts and seen often in

contracts for offshore work. - So what do they really mean?

Indemnities and Wilful Misconduct

For further reading on indemnities from Lexplore see Indemnities advice for startups (Click Here) and

Liabilities and Indemnities (Click Here). As described in those articles carve-outs for Wilful

Misconduct are common, so let’s take a closer look at those terms.

The basic concept:

Each party is responsible for covering its own losses (in relation to its own property, people and

pollution)

REGARDLESS of who was at fault or caused such loss

EXCEPT if due to the other party’s “Wilful Misconduct”/“Gross Negligence”

Should Wilful Misconduct be carved out of the Indemnities?

The traditional position was to use a “knock for knock” or mutual hold harmless regime where each

party was responsible for its own property, people and pollution irrespective of any type of fault of the

other party.

Wilful Misconduct/Gross Negligence carve-outs have become much more common in recent years. The

position is far clearer in a “knock for knock” regime and it may be advisable to try and negotiate that as

a default position.

Whilst the courts have some common view of what the terms “Wilful Misconduct”/”Gross Negligence”

should mean, it is always advisable to use clear definitions because there is no precise definition in

English law.

When defining these terms, be sure to include references to “intentional” or “conscious” disregard of

“foreseeable” and “harmful” consequences to safety/physical property and always exclude “errors of

judgement” or “mistakes” made in good faith.

Senior Management Personnel

If Wilful Misconduct/Gross Negligence carve-outs are accepted, it is important to restrict that to only

the actions of the “Senior Management Personnel” of the relevant party. This means that the exceptions

to the indemnities are then limited only to those people who really influence the decisions and actions

of the company.

For example, if a non-senior offshore worker (e.g. a roustabout) does something negligent, reckless or

even deliberate that causes loss and/or damage, it is normally not the intent of the parties for this to be

categorised as Wilful Misconduct / Gross Negligence.

An extreme example, which would be expected to be classed as Wilful Misconduct/Gross Negligence,

would be an OIM doing something deliberately (or deliberately failing to do something) to cause a

huge oil spill.The definition of “Senior Management Personnel” needs to be carefully scrutinised and

drafted to capture the level of seniority relevant to your company.

Phrases like “anyone that reports to the board of directors” are often used – if your organisational

structure is “flat” that could capture junior members of your company, so be sure to tailor it as

appropriate.

Conclusion

If Wilful Misconduct / Gross Negligence is going to be carved out of your indemnities regime, please

ensure that those terms are clearly defined and then limited appropriately, before entering into a service

contract agreement.

Lex Energy is renounced legal consultancy in UK with complete knowledge of all sectors and

phases of the energy industry. For more details visit http://www.lex-energy.co.uk