Effects of Recent Insolvencies in the Offshore Oil and Gas Industry on the Efficacy of Knock-for-Knock Provisions
NUS - Centre for Maritime Law Working Paper 18/02
42 Pages Posted: 26 Mar 2018 Last revised: 1 Apr 2018
Date Written: March 26, 2018
The offshore environment is fraught with risk - dangerous operating conditions, high financial stakes and the potential for catastrophic consequences. Knock-for-Knock indemnity provisions (KK provisions) were formulated on the realization that contractors’ balance sheets could not cope with potential liability for catastrophic damage to property or consequential long-term disruption to oil production. Further, such clauses simplify risk allocation and determine and attribute liability. It is not uncommon for different contractors (whether within a working consortium or not) to split tasks, and for responsibilities in the scope of work to overlap. The advantages of KK provisions have led to their development and widespread use, providing a web of indemnities and exclusions to allocate, manage and underwrite risk and liability within a project. However, in recent times, the efficacy of KK provisions in managing, allocating and underwriting risks has been unravelled by a wave of insolvencies and corporate rehabilitations in the oil and gas sector due to persistent low oil prices. This paper examines how these developments could undermine KK provisions with catastrophic consequences for the participants in a project, and explores the need for reform to meet these challenges.
Keywords: Knock-for-Knock, insolvency, SUPPLYTIME, offshore, oil and gas
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