Knock-for-knock clauses

“Knock-for-knock clauses,” an article by Akin Gump London international disputes head Justin Williams and counsel Tom Evans, has been published by The Journal of World Energy Law & Business. The article discusses a recent decision by the English Court of Appeal regarding the contractual freedom of parties to agree to broad exclusions of liability, including consequential loss.

Looking at the case of Transocean v. Providence, the authors discuss the Court of Appeal’s decisive rejection of a challenge to the “knock-for-knock” principle, the basic premise of which is that each party bears its own risk. As they note, “Wide-ranging indemnities are common in offshore drilling contracts and are a way of creating certainty in respect of apportionment of risk…Therefore, although drilling contractors can incur reduced or zero day rates and be exposed to termination, they are otherwise often not thought to be liable for any delays and losses suffered by the oil company.”

They note that the court made clear its position regarding the knock-for-knock clause: “[R]estrictive interpretations of such clause are only justified where there is ambiguity, otherwise, the parties’ bargain should be upheld.”

In the article, Williams and Evans discuss knock-for-knock indemnities, market perception of knock-for-knock and the case in question. They conclude by noting that, “Where a knock-for-knock clause is clearly worded, the Court of Appeal has made clear that it would be at odds with the concept of party autonomy and freedom of contract to interpret that clause restrictively. The importance of precision when drafting knock-for-knock indemnities is plainly paramount, but on the basis of the Transocean case, well-drafted clauses are likely to be upheld as the courts seek to give effect to the language of a contract as drafted by the commercial parties.”