Background

A knock-for-knock indemnity clause is a contractual risk allocation mechanism commonly utilized in the oil and gas industry. Charterparties and other maritime contracts concerning vessels also sometimes include this concept.

What are knock-for-knock indemnities?

A typical knock-for-knock indemnity clause states that a party (the “first party”) holds the contract counterparty (the “second party”) harmless from any loss or damage to the first party’s property or persons, and the reciprocal (identical) indemnity is given by the second party in favor of the first party. A key feature of a knock-for-knock indemnity clause is that they are mutual. Each party accepts responsibility for losses to its own property and persons, regardless of fault. This provides certainty to the contracting parties and avoids lengthy court proceedings.

How are knock-for-knock indemnity clauses drafted?

While the concept of a knock-for-knock indemnity is common, the contours of knock-for-knock indemnity clauses can vary. The scope of the clause can extend beyond the immediate contract counterparties. The timing of the claims can be limited. The extent of loss coverage may change. And perhaps most significantly, the parties may apply the clause regardless of a party’s negligence or misconduct.

What are the key considerations when interpreting a knock-for-knock indemnity clause?

The specific language of the clause is of paramount importance. As the clause attempts to deviate from a more traditional fault-based indemnity, unambiguous language setting forth the party’s intent is important.

While the clause is prevalent in oil and gas and maritime contexts, there is a question as to whether a court will enforce it in the context of a party’s gross negligence, willful misconduct, fraud or other intentional misconduct. Courts have expressed skepticism, in that indemnification for damages flowing from the intentional causation of injury may be unenforceable as against public policy. Different jurisdictions may apply slightly different standards with respect to this matter.