Published 26 April 2017
Conventional indemnities manage and allocate risks between parties by protecting each party from losses suffered as a result of breach of contract, breach of statutory duty or negligence of the other party. Liability of a party to indemnify for property damage, personal injury and economic loss will be triggered typically upon causation being established between acts or omissions of the indemnifying party and loss suffered by the indemnified party. In the offshore engineering and construction industry, however, a seemingly counter-intuitive mechanism known as knock-for-knock indemnity is deployed where each party assumes responsibility for personal injury suffered by its own employees, loss of or damage to its own property and pollution emanating from its own property regardless of which party to the contract has caused the loss. Although such a mechanism injects certainty and clarity for commercial parties, it gives rise to moral hazard and public policy concerns. To alleviate those concerns and limit its scope, some jurisdictions have enacted anti-indemnity legislations, restrictive drafting of knock-for-knock indemnity provisions is practised, and stray judicial restrictions have been attempted. Advancements in drilling technology and floating production and drilling units have made hydrocarbon prospects that were previously unreachable, viable. As a result, with ever-increasing production in deepwater and ultra-deepwater projects, knock-for-knock indemnity will remain at the forefront of risk allocation mechanisms; however, a more nuanced form of the indemnity may be necessary for mitigating and allocating the attendant higher risks in such projects.