Supplytime 2017 | Liabilities - a simple guide
Upon its release, the general consensus has been that the new version represented an ‘update’ to the earlier version. The objective was seemingly not to introduce sweeping changes, but rather to bring the existing draft in line with market practice and legal developments and clear up areas of confusion.
On this basis, it therefore seems reasonable to expect that (following a transitional period) this form will overtake its predecessor as the new standard for the offshore supply industry. Despite a largely positive response, changes to a well-loved standard form can often bring unease to its proponents. In the months following the release of the new draft, we have received a number of queries from clients relating to different aspects of these changes. Many of these relate to the allocation of liabilities in the new version. With this in mind, we have prepared the below simplified explanation of the changes to the liability picture arising from this ‘update’.
Liability scheme - Knock for knock
The liability scheme in the SUPPLYTIME is based on ‘knock-for-knock’ principles. Many are familiar with these principles, but for those that are not; this concept essentially provides that each party takes responsibility for loss or damage to its own property and injury or death of its own personnel. This applies irrespective of who caused such loss, damage or personal injury or death. In simple terms, this is achieved through a mutual agreement that each party will (i) hold the other party ‘harmless’; and (ii) indemnify the other party, from claims which fall within the first party’s responsibility.
The benefits of such a scheme are twofold. Firstly, to limit the insurance cover each party to a contract must take (and the corresponding project cost) by avoiding the need for duplication to cover. Secondly, to reduce the scope for costly and resource-draining disputes where, for e.g., damage or loss occurs, since it will be the damage itself rather than its cause that determines responsibility.
The 2005 version was based on the knock-for-knock principle. There were however a number of carve outs that dilute the regime and, consequently, its benefits. Examples of these include Charterers’ responsibility to Owners for damage to the vessel caused by the dangerous cargo (where not properly marked, packer or notified) or the supply of unsuitable or off-spec fuel. In the revised version most of these carve-outs have been removed to provide a more ‘pure’ knock for knock, of the type advocated by the insurance industry.
In the revised version most (but not all) of these carve-outs have been removed to provide a more ‘pure’ knock for knock, of the type advocated by the insurance industry. Since most of these carve-outs were from Owners’ liability, this has left a more even distribution of liabilities and indemnities.
Another important development for the liability regime has been the expansion of the definitions of the ‘Owners’ Group’ and ‘Charterers’ Group’. It is an important feature of the knock for knock regime that this extends beyond merely the contractual parties, to the other entities involved in the applicable project on either party’s side. Otherwise, the effectiveness of the knock for knock regime (and the benefits described above) would be significantly undermined. The definition of the party’s respective “Group” is therefore significant. The 2005 version of the SUPPLYTIME has been subject to criticism in the past that the definitions have not gone far enough, leaving gaps and potentially unpleasant surprises for Owners and Charterers alike.
The new SUPPLYTIME has addressed these concerns by including significantly expanded definitions in each case.
“Charterers’ Group” now takes a more inclusive approach, including ‘contractors and sub-contractors (of any tier)’. Up the chain, the Group includes ‘clients (of any tier)’ - noticeably dropping the requirement for a contractual relationship. It also includes all co-venturers of Charterers and their clients as well as any affiliates of the above.
“Owners’ Group” includes the Owners’ ‘affiliates’ and ‘contractors and sub-contractors (of any tier)’ but always related to the work or project on which the vessel is employed.
Each definition further includes all employees of any of the listed entities.
This expansion is important because it reduces the number of ‘third parties’ which are not covered by the liability scheme and where usual non-contractual fault-based liability would arise. Given the number of parties typically operating on a particular field at any one time, this widening of the liability regime should give a greater sense of predictability to the contracting parties.
Lastly on this point, it is worth noting that the reciprocal hold harmless and indemnity set out in the knock-for-knock provisions is now given in favour of the other Group and not just the other party; as in the 2005 version.
The regulation on consequential losses is another area which has seen significant expansion in the new draft. The intention here is to reflect recent English law legal developments. We have discussed in more general terms the definition and exclusion of consequential losses in SANDS’ newsletter of early April 2017, so will limit this to a short and simple explanation.
Under English law, what may be perceived as "consequential losses" may nonetheless be direct and recoverable, in a way they may not be in other jurisdictions.
In the 2017 SUPPLYTIME, all categories of excluded loss (e.g. loss of use, loss of profits etc.,) are specified and listed to ensure that they are excluded whether legally ‘consequential’, ‘direct’ or ‘indirect’. This is then supplemented by a more generic exclusion of consequential or indirect loss. The new drafting has taken an expansive approach; with recent English case law in mind, to ensure that the Parties have excluded the categories of loss that have traditionally (if not necessarily ‘legally’) been viewed as ‘consequential losses’.
Under the new SUPPLYTIME, the Owners will now be liable for any pollution from the vessel, i.e. discharge, spills or leaks from the vessel, irrespective of cause. This seems more in line with industry practice than the 2005 edition, where such liability was limited to discharge, spills or leaks arising from the acts or omissions of the Owners and their personnel. On the other side, the Charterers’ obligation to indemnify the Owners from and against liability for pollution from any other source has been widened to apply to the whole Owners’ Group (see Group paragraph above).
By updating the indemnity provisions, and expanding the scope of the knock for knock regime, pollution and consequential losses regulation, the SUPPLYTIME 2017 should provide greater predictability for contracting parties. Nevertheless, parties would be well advised to keep an eye on legal developments to see how these revised provisions stand up to the scrutiny of courts and arbitration tribunals as the new version becomes more widely adopted.
For reasons of expediency, we have sought to keep this as a simple overview of a specific area of the changes in the new SUPPLYTIME. Should you have any questions or comments on this or any of the other changes, please contact the undersigned.