Esbjerg, 18 March 2014

Copenhagen, 20 March 2014

Liability, Indemnity and Insurance in Offshore Contracts

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Programme

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1. Welcome 17.00–17.15

2. Liability and Indemnity 17.15–17.45 (Sandroos)

3. The Oil Company’s Perspective 17.45-18.30 (Johansen)

Break 18.30-18.45

4. The Supplier’s Perspective 18.45-19.30 (Skovbjerg)

Close of seminar 19.30

Themes for the introduction

I Liability under contract – Liability for defects

– Liability for delayed delivery

II Tort liability – The starting points

– Knock-for-knock and insurance

– Direct vs. indirect loss

– Limitations of liability

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Liability for defects

Liability for delay

I. Liability under contract

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Liability under contract Defects

“The CONTRACTOR warrants and guarantees that it has performed and shall perform the WORK in accordance with the provisions of the CONTRACT, and that the WORK will be free from defects.

In the event that the COMPANY notifies the CONTRACTOR of any defects in the WORK prior to or subsequent to the COMPLETION DATE, the CONTRACTOR shall, carry out all works necessary to correct any defects in the WORK arising from any default of the CONTRACTOR GROUP at its sole cost and expense.”

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Liability under contract Delay

“If the Work is delayed in relation to the penalty milestones set forth in Appendix C, then Contractor shall pay liquidated damages to Company.

The liquidated damages for each Day of delay shall be calculated on the contractual value of the Work which should have been completed according to the Contract Schedule by the penalty milestone in question or, as the case may be, by the Delivery Date. The daily liquidated damages for not meeting such milestone or the Delivery Date shall be 0,15%.

Contractor's cumulative liability for liquidated damages under the Contract is limited to 10% of the Contract Price.”

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The starting points

Knock-for-knock and insurance

Direct vs. indirect loss

Limitations of liability

Summing up

II. Tort liability

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Physical loss, damage or injury

• Physical loss or damage to property – Equipment is lost

– A module under construction turns over

• Personal injury, illness – A broken leg, a broken back, pneumonia

As opposed to the liability for

• Defects – E.g. non-compliance with specifications, or

– unskilled labour

• Delay – E.g. late delivery of the module, or

– late arrival of crew

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Knock-for-knock – starting point

• You are liable for losses/damage to yourself – Irrespective of the other party’s negligence

• Liability distributed to where the damage/loss occurs – Who has suffered the loss

– Holds the other party harmless from claims yourself and your own employees (and third parties, where you are liable)

– Irrespective of how arisen, negligence, by whome, and size of loss

• An agreed channelling of liability with financing of loss via insurance

– Time-saving - Avoids litigation - Predictable

• Knock-for-knock directs management attention to the critical path

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Risk Zones

Subcontractors (with affiliates) incl.

management, employees and consultants

Contractors (with affiliates) incl. management,

employees and consultants

Operator (with affiliates) incl. management,

employees and consultant + partners (co-venturers)

Company

Fabrication

Compressors for processing

facility

Supplies for

steel jacket

Installation

Anchor handling

vessel

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Operator’s nuclear family

Operator’s extended family

Contractor’s family

(Genuine) Third-parties

Knock-for-knock - Contractor

“The CONTRACTOR shall be responsible for and shall save, indemnify, defend and hold harmless the COMPANY GROUP from and against all claims, losses, damages, costs (including legal costs) expenses and liabilities in respect of:

(a) loss of or damage to property of the CONTRACTOR GROUP whether owned, hired, leased or otherwise provided by the CONTRACTOR GROUP arising from, relating to or in connection with the performance or non-performance of the CONTRACT; and

(b) personal injury including death or disease to any person employed by the

CONTRACTOR GROUP arising from, relating to or in connection with the performance or non-performance of the CONTRACT; and

(c) subject to any other express provisions of the CONTRACT, personal injury

including death or disease or loss of or damage to the property of any third

party to the extent that any such injury, loss or damage is caused by the

negligence or breach of duty (whether statutory or otherwise) of the

CONTRACTOR GROUP.”

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Knock-for-knock - Company

“The COMPANY shall be responsible for and shall save, indemnify, defend and hold harmless the CONTRACTOR GROUP from and against all claims, losses, damages, costs (including legal costs) expenses and liabilities in respect of:

(a) loss of or damage to property of the COMPANY GROUP whether (i) owned by the COMPANY GROUP, or (ii) leased or otherwise obtained under arrangements with financial institutions by the COMPANY GROUP which is located at the WORKSITE arising from, relating to or in connection with the performance or non-performance of the CONTRACT, but excluding the PERMANENT WORK; and

(b) personal injury including death or disease to any person employed by the

COMPANY GROUP arising from, relating to or in connection with the

performance or non-performance of the CONTRACT; and

(c) subject to any other express provisions of the CONTRACT, personal injury

including death or disease or loss of or damage to the property of any third

party to the extent that any such injury, loss or damage is caused by the

negligence or breach of duty (whether statutory or otherwise) of the

COMPANY GROUP.” 21/03/2014 12

Insurance – the ”waiver of subrogation”

”All insurances required under this Clause shall be endorsed to provide that underwriters waive any rights of recourse, including in particular subrogation rights against the COMPANY, CO-VENTURERS and its and their respective AFFILIATES in relation to the CONTRACT to the extent of the liabilities assumed by the CONTRACTOR under the CONTRACT.”

Norwegian contract:

”I polisene skal assurandørene fraskrive seg enhver regressrett overfor Selskapsgruppen.”

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Direct vs. indirect loss

• There is no final and official definition of ”indirect loss”

• The difference between direct and indirect is difficult to tell

• You are liable for all losses caused by you, unless excempted or limited

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Direct vs. indirect loss

“For the purposes of this Contract the expression “Consequential Loss” shall mean:

(i) consequential or indirect loss as defined under [Applicable Law]; and

(ii) loss and/or deferral of production, loss of product, loss of use, loss of revenue, profit or anticipated profit (if any), in each case whether direct or indirect to the extent that these are not included in (i), and whether or not foreseeable at the Effective Date.

Notwithstanding any provision to the contrary elsewhere in the CONTRACT, the COMPANY shall save, indemnify, defend and hold harmless the CONTRACTOR GROUP from the COMPANY GROUP’s own Consequential Loss and the CONTRACTOR shall save, indemnify, defend and hold harmless the COMPANY GROUP from the CONTRACTOR GROUP’s own Consequential Loss, arising from, relating to or in connection with the performance or non-performance of the CONTRACT.”

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Limitations of liability

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Liability in contract Tort liability

Defects (15%?) Damage to own people/assets

Delay (10%?) – ”sole remedy”? Damage to the other party’s people/assets

Intellectual Property Rights (IPR) (limitation?) Damage to third parties

Other issues

- Tax

- Laws, rules, regulations and standards

- HSE

- Exportcontrol, Anticorruption

Liability of limitation of one or more of the above issues

Defects: carve out for e.g. offshore work, travel, etc.

Limitation of liability for one or more of the above issuess

(the other party indemnify) – knock-for-knock

Total limitation of liability for the contractual liability (e.g. 100% of the contract sum)

”Indirect loss”/”consequential loss”

- Business interruption, production loss and deferrall

- Loss of revenue and profits

- Business opportunities

- Goodwill

- Costs to other suppliers

”Indirect loss”/”consequential loss”

- Business interruption, production loss and deferrall

- Loss of revenue and profits

- Business opportunities

- Goodwill

- Costs to other suppliers

Limitation of liability for ”indirect loss”/”consequential loss” (properly defined)

Total limitation of liability (”global”)

Putting it together

Knock-for-knock

Insurance

Activity specific risks

Exclusions or carve-outs

Sole or contributory negligence

Protected interests

Time

Geography

Degree of negligence

Definition of risk zones

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Company

Affiliates / Group

Its/their

- Managers

- Employees

- Consultants

- Subcontractors

Co-venturers

Intent

Willful misconduct

Gross negligence

Negligence

Start and finish

Worksites

Transportation routes

World-wide

Prior to contract signing

Design, pre-studies

During suspension/stop

Termination

Completion Certificate

Warranty period

After warranty period

Personal illness, injury and death

Property

The Work / Permanent Work

Third-parties

The environment

Other contract clauses………

Sole negligence

Contibutory negligence

Risk zones

Degrees of negligence

Geopgraphic sites

Time periods

Protected interests not covered

- Special types of equipment

Sole/contributory

Drilling: subseq and borehole equipment

Diving/ROV: specific equipment

Lift: the crane, the heavy-lift vessel

Company’s insurances

Construction All-Risk (CAR)

- Coverages

- Deductibles

Contractor’s insurances

- Workmen’s compensation

- P&I, Hull & Machinery

- Third-party Liability

- Aircraft, Automobiles, Other

Summing up – knock-for-knock drafting

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Sandroos

Kronprinsessegade 46E

1306 København K

40 88 54 22

sandroos@sandroos.dk

www.sandroos.dk

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