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Abstract<\/span><\/strong><\/span><\/p>\n Oil and gas services by their inherent nature are a very risky industry. The parties involved need to be careful while contracting and undertaking obligations. Through these obligations arise risks. It is important for parties to understand such risks and take appropriate measures to mitigate the same.<\/span><\/p>\n Knock-for-Knock indemnity is one such measure through which operators and contractors allocate risk and plan risk mitigation measures. Knock-for-knock indemnity is a reciprocal indemnity given by parties wherein each party is responsible for any losses that are caused to its own personnel and any damages that are caused to its own property.<\/span><\/p>\n The prime benefit of Knock-for Knock Indemnity is the reduced insurance cost wherein each party is ensuring its own personnel and property.\u00a0 Additionally, parties save time and money as they are not required to establish fault to claim indemnity.\u00a0 This principle of Knock-for-Knock Indemnity is the exact opposite of a Fault-based regime.\u00a0<\/span><\/p>\n While drafting Knock-for Knock Indemnity, one must appropriately define the \u201cindemnified party\u201d as the same would determine the scope of coverage. A few additional points to be kept in mind are the exclusions to such scope. Parties should beforehand decide whether they would like to include\/exclude losses arising from gross negligence, wilful misconduct, material breach of contract and\/or statutory obligations, consequential losses, etc. While knock-for-knock is a prevalent practice in the Oil and Gas sector, the concept itself is untested in many jurisdictions. Hence, it is very important to draft such clauses with great precision.<\/span><\/p>\n <\/strong><\/p>\n Introduction<\/strong><\/p>\n The term indemnity is a concept where one party undertakes to make good for the losses that are caused to the other party.<\/span><\/p>\n Under the<\/span>Indian Law<\/a>, the Contract of Indemnity is defined as a contract by which one party guarantees to save the other person from loss caused to him by the action of the guarantor himself, or by the action of any other person.<\/span><\/span><\/p>\n The indemnity clause, therefore, determines which party shall bear risk under what circumstances. The clause also covers the nature of claims.<\/span><\/p>\n A Knock-for-Knock indemnity is a subset of indemnity wherein one party undertakes to indemnify the other party against any claims that arise from death or injury to its personnel, damage to its own property irrespective of the fact that by whose fault the damage or injury has resulted from.<\/span><\/p>\n This concept is prevalent in the oil and gas industry where operators of the oil platforms and their contractors\u2019 performing services on such platforms undertake Knock-for-Knock obligations. More than the concept of \u201cmake good\u201d, the principle behind this concept is the identification and allocation of risk associated with the contract. The logic behind this concept is that the magnitude of risk involved in oil and gas sector contracts is very high. Considering the performance capabilities, financial strength, scope of work, and profits margins of the small contractors, it is unfair to impose an indemnity on a contractor wherein he is liable for anything that goes wrong in the whole operations. Hence, the parties opt for Knock-for-Knock indemnity wherein each party is responsible for claims arising from its personnel and property irrespective of the fault.<\/span><\/p>\n Ingredients<\/strong><\/p>\n 1) It is a mutual indemnity where each party indemnifies the other one and is reciprocal in nature.<\/span><\/p>\n 2) Parties shall compensate each other for the losses that arise from:<\/span><\/p>\n a. Damage to its own property<\/span><\/p>\n b. Death or injury of its own personnel\u00a0<\/span><\/p>\n Each party is responsible for any other third-party claims and the same shall be determined based on negligence or breach from such party.<\/span><\/p>\n 3) This concept is the exact opposite of a fault-based regime wherein a party at fault is required to indemnify the other party. Under Knock-for-Knock indemnity, a party is required to indemnify for claims arising from its personnel and property irrespective of the fault.<\/span><\/p>\n 4) The injured party is compensated. Only the party compensating for such losses change.<\/span><\/p>\n 5) The definition of the indemnified party would usually include each party\u2019s contractors and affiliates (usually defined as \u201cIndemnified Group\u201d). This plays a factor in determining the scope of Knock-for-Knock indemnity.<\/span><\/p>\n 6) Upon risk allocation, the Parties will either mitigate such risk by insurance or could self-insure themselves.<\/span><\/p>\n <\/strong><\/p>\n Benefits of Knock-for-Knock vis-\u00e0-vis Fault-based Indemnity<\/strong><\/p>\n Advantages of Knock-for-Knock regime:<\/strong><\/span><\/p>\n 1) This system helps in risk identification and allocation to a definitive party. This is beneficial both for the indemnifying party and the claimant. Indemnifying can do a better risk assessment and accordingly take steps toward risk mitigation through third-party insurance or self-insurance. For the injured party\/claimant, receipt of an expeditious payment is useful.<\/span><\/p>\n 2) Parties do not waste resources (time and money in litigation) to establish fault since the indemnity is determined by who is being indemnified rather than whose fault is it.<\/span><\/p>\n 3) Avoidance of double insurance by both parties, for the same subject matter, is one of the biggest benefits of this regime. Considering that the cost of insurance would ultimately be built in the project cost, results in eventual cost reduction in the project.<\/span><\/p>\n Disadvantages of Knock-for-Knock regime<\/strong>:<\/span><\/p>\n 1) The flaw with the Knock-for-Knock arrangement is the very principle that a party is being liable for damage that has not resulted from its fault or non-performance. In this no-fault regime, a party is liable to indemnify the other party even if such indemnified party could have been grossly or contributorily negligent.<\/span><\/p>\n 2) The Knock-for-Knock has certain industry recognised exceptions (detailed down in the section below). If such exceptions form a part of the clause, either party could be held liable for losses; hence, both the parties are forced to take insurance. This would also result in increased litigation in order to establish which party is at fault. This could generate additional costs and be time-consuming.<\/span><\/p>\n Fault-based vs Knock-for-Knock<\/strong>:<\/span><\/p>\nMeaning<\/strong>:<\/span><\/h3>\n