Knock for knock (KFK)

Argentina

Situation: Favourable

According to Argentine Civil Law, contractual wording is binding, so long as there is no conflict with laws or there is no violation of public order, morals or good customs. As such, KFK clauses are likely to be valid.

Inconsistent approaches and rationales, not only between states, but also between courts in the same state, leaves little settled in respect of the enforceability of KFK clauses. Each clause must be assessed independently taking into consideration the language of the agreement, the existence of insurance, and the potential applicability of hostile law to determine whether the clause can be relied upon and if that clause will provide any meaningful protection.

Australia

Situation: Somewhat favourable

The validity and enforceability of K4K clauses in Australia should not be regarded as absolute, and that there are some situations where the position could be affected by local legislation.

In many situations, KFK clauses will be upheld and enforced by the Australian court. However, an important feature of Australian law is that there are some powerful statutory provisions relevant to the recovery of civil damages, from which the parties cannot contract-out and which have the potential to affect the enforceability of K4K clauses in certain cases.

Although these statutory provisions are powerful, they are likely to be engaged only in a relatively narrow range of factual scenarios. As such, in many situations K4K clauses are likely to be upheld by an Australian court.  However, in those cases where the relevant statutory provisions are engaged, the result could be that the overall effectiveness of a K4K clause will be subject to doubt. There are, however, ways to potentially address such an outcome within the wording of the parties' contract.

Brazil

Situation: Untested

KFK clauses are potentially valid provided they do not contradict public order or affect third parties.

The Brazilian Civil Code’s most basic principle is that any person who causes damage to another shall indemnify that party in proportion to the damages caused.   Brazil does however accept freedom of contract and could therefore find the KFK principle valid so long as they do not contradict public order or affect third parties and as long as the contract has been entered into by free negotiation or is agreed by both parties.

It would therefore appear that a clause limiting liability for third parties or public interest, such as a limitation of liability clause for pollution or third party claims, would or could be held void. However, this has never been tested and nor has a contract been challenged due to lack of free negotiation or bargaining strength.

Canada

Situation: Untested

Canadian law does not prohibit limitation/exclusion of liability clauses or indemnification clauses in contracts. However, the legality and enforceability of a particular KFK clause under Canadian law can only be determined on a case-by-case basis.

To date, the Canadian courts have not considered the enforceability of KFK clauses. Generally speaking, Canadian law does not prohibit limitation/exclusion of liability clauses or indemnification clauses in contracts. To be enforceable, however, clear and express wording in favour of the party seeking to invoke the clause is required.

The Canadian courts will also consider whether the clause in question was unconscionable at the time the contract was entered into, and whether the clause should not be enforced on public policy grounds. Presumably, such considerations would be especially heightened in a case where a party sought to exclude liability for its gross negligence, breach of contract, or wilful misconduct. Given these factors, and differences in the wording of KFK clauses, the legality and enforceability of a particular KFK clause under Canadian law can only be determined on a case-by-case basis.

Chile

Situation: Untested but likely unfavourable

KFK clauses are untested under Chilean law. Although under the Chilean law it is possible to modify or alter the liability under a contract, there are exceptions to this. A contractual party cannot modify its legal liability in relation to damages for personal injuries or to third parties, which are part of the backbone of KFK regimes. The reason why these are considered an exception to the typical liberty of contracting is that persons are beyond human commerce and third parties are always entitled to sue, regardless of the terms of a contract provision.

It is also important to note that Chilean law equates gross negligence with fraud under the civil code, and therefore any liability clause would only be valid insofar as it relates to ordinarily negligence.

In addition, under the Chilean Code of Commerce, a Towcon or Towhire  contract liability regime dealing with liability for the tow would likely not be upheld by the courts, as Art 1084 does not allow such a modification.

Colombia

Situation: Unfavourable

It is likely that the Courts in Colombia would consider that KFK regimes run contrary to local legislation and, as such, it is unlikely that they would be upheld.

Colombia is a civil law jurisdiction which derives most of its law from statute. According to Colombian law, certain regulations of a mandatory nature prevent parties agreeing under contract an intentional breach of their obligations (i.e. by means of wilful misconduct of a party). These constraining provisions are set out under the Colombian Commercial Code rules, which are applicable to offshore contracts. Any contractual clause which is inconsistent with these provisions will be considered void and null under Article 899 of the Commercial Code. It is likely that the courts would consider a KFK clause as being as a violation of a mandatory rule of law and therefore unenforceable.

Denmark

Situation: Untested (likely to be favourable)

Whilst KFK clauses have not been tested by the Danish Courts, it is likely that KFK clauses will be upheld provided they are clearly drafted.

Whilst there is no published case law on KFK clauses, there has been an indication from the Maritime and Commercial Court that KFK clauses will be accepted if the clause is clearly drafted. In legal literature there is an expectation that the Danish Courts will uphold KFK regimes entered into within the offshore industry, even where there has been gross negligence.  The position is thought to be less clear where there is evidence of intent and where there is personal injury.

England and Wales

Situation: Favourable

KFK clauses are valid and have been upheld by the Courts and Tribunals of England and Wales.

KFK contractual regimes are valid and will be upheld by the Courts and Tribunals. 

The applicability and reach of a KFK provision will be subject to the rules of interpretation that apply to exemption and limitation clauses.  Clauses will be interpreted strictly against the party seeking to rely on their terms.  It is therefore crucial that the clauses forming part of the KFK regime are entirely unambiguous as to precisely what liabilities are being excluded and what the indemnity provisions cover.

Finland

Situation: Untested

KFK clauses are so far untested in Finnish courts. Freedom of contract is a fundamental principle under Finnish contract law and therefore, subject to certain considerations, and provided that it has been drafted clearly, it is probable that Finnish courts would recognise and uphold a KFK clause

France

Situation: Untested

The French courts have not yet ruled directly on KFK clauses but they may be valid, subject to France’s rules on limitation and exemption of liability.

French courts have not yet ruled directly on KFK clauses under offshore oil and gas contracts, but French Courts have long recognised the validity of such clauses in other fields.

Limitation or exemption of liability clauses are only valid if the clause (i) is drafted clearly and unambiguously, (ii) is known and accepted by the opposing party, and (iii) does not amount to an entire exemption of a party from its main contractual obligations.

It is recognised that if a contracting party looking to enforce a KFK provision committed fraudulent, gross or wilful negligence, then the clause would be dismissed and the liable party would be held fully responsible for the damage.

Germany

Situation: Untested

KFK clauses are untested under German law and will be measured against German unfair terms and conditions legislation. Whether they will prevail in the circumstances will depend on their interpretation by the courts in the specific case.

Under German law, the type of contract dictates how it is interpreted.  Regard must be had to the German law principles of 'good faith' and 'unconscionable conduct' (i.e. harsh and oppressive conduct).

Individual agreement - A KFK clause agreed upon by way of an individual negotiation will be deemed to be invalid to the extent that liability is excluded for intentional behaviour (i.e. wilful misconduct); but in all other cases, a KFK clause is likely to be deemed valid as a matter of principle.

General terms and conditions – the German Civil Code contains rules ensuring fairness and appropriateness.  A KFK clause in a standard term contract that contravenes the German Civil Code is likely to be deemed invalid.

Greece

Situation: Untested

KFK clauses have not been tested by Greek courts.

In the context of Greek Law, there is no specific law governing KFK contractual regimes. As a general rule, parties are free to agree the terms of a contract. This means that in a contract the parties can generally increase or restrict (or even exempt) the liability of a party, as long as they do so in good faith without violating any rules of public order.

Hong Kong

Situation: Favourable

KFK clauses are valid and will be subject to interpretation of the exemption of limitation clause.

KFK contractual regimes are valid in Hong Kong and will be subject to interpretation of the exemption of limitation clause.  The applicability and reach of a KFK provision will be subject to the rules of interpretation that apply to exemption and limitation clauses.

India

Situation: Untested

KFK clauses have yet to be tested by Indian courts.

The validity of KFK liability clauses under offshore oil and gas contracts remains untested by Indian courts.  It is recognised that English law does have persuasive value and it may therefore influence an Indian court.

Italy

Situation:  Untested

Italian courts have yet to directly rule on the validity of KFK clauses. However, such clauses are, in principle, recognized under Italian law, albeit with certain limitations.

The position under Italian law is different depending on the law which governs the contract:

Contracts Governed by Italian Law

Article 1229 of the Civil Code (“Exoneration of liability clauses”) provides that: “any agreement which, in advance, excludes or limits the liability of the debtor for intentional misconduct or gross negligence is void”. This provision is considered to be one “which cannot be derogated by the parties”. However, according to articles 1341 (“terms & conditions of the contract”) and 1342 (“standard form contracts”), limitation or exemption of liability clauses are valid only if they are “specifically approved” in writing by the parties.

As such, a clause limiting liability, such as a KFK clause, must be “specifically approved” by the contracting parties, but where liability arises from gross negligence or wilful misconduct, it would be void under article 1229.

Contracts Governed by Foreign Laws in Italian Courts

Pursuant to the Rome I Convention, public interest can justify the courts of the Member States, in exceptional circumstances, applying exceptions based on public policy and overriding mandatory provisions. This means that even in case where a contract is governed by foreign law, Italian Judges could consider article 1229 as an overriding mandatory provision and therefore deny the applicability of a KFK clause to those damages caused by gross negligence or wilful misconduct.

Japan

Situation: Favourable

Freedom of contract is recognised under Japanese law and KFK clauses are in general valid but they must be clear and unambiguous.

Freedom of contract is recognised under Japanese law and therefore KFK and limitation of liability clauses are in general valid. There are however some exceptions to this, for example when clauses are considered to be contrary to public order or good morality. In addition, in the case of wilful misconduct or gross negligence, it is likely that a KFK clause would be regarded as invalid (or interpreted so as to not to apply), but this has not yet been tested in the courts.

In construing KFK clauses in contracts under Japanese law, the usual rules of interpretation apply. This means that the clause has to be worded clearly and unambiguously. If there is any ambiguity, the clause will normally be construed against the party who was responsible for the preparation of the contract and/or who will benefit from the clause.

Kazakstahn

Situation: Untested

Although KFK provisions are used in Kazakhstan, they are typically found in contracts governed by English law. Where such contracts to be governed by Kazakhstan law, it is uncertain how these provisions would operate and, to date, such provisions are untested in the Kazakh courts.

Malaysia

Situation: Untested

Knock for knock is a principle used in many contract in Malaysia, however the principle has not yet been tested out in the court system. Under Malaysian law, however, the general rule is that if a contract is drafted with a clear wording and the consideration or object of the agreed is in accourdance with todays regulation, this should be upheld by the courts.

In addition the usual interpretation rules on limitation and exemption clauses would apply in any circumstances.

Nigeria

Situation: Untested

The validity and enforceability of KfK clauses are yet to be tested by Nigerian courts. It is possible, drawing from judicial attitude to exclusion clauses in contracts governed by Nigerian law, that KfK clauses would be upheld where they are interpreted and/or construed by Nigerian courts, provided they are properly drafted and not contrary to Nigerian public policy, not otherwise inconsistent with Nigerian law nor tainted by vitiating elements.

Norway

Situation: Favourable.

KFK clauses are generally accepted by the Norwegian courts.

The Norwegian legislature has given the courts a “safety valve” which allows the court to set aside or make provisions void when unreasonable.  There is however a fundamental freedom to contract and there is a high threshold for this right to be exercised.

The freedom of contract is a general rule of Norwegian law; but a clause, or the contract in itself, can be set aside or amended, if the contract or the clause is deemed unreasonable. However this is very unusual.

People’s Republic of China

Situation: Untested

KFK clauses have yet to be tested by PRC courts

The validity of KFK liability clauses under offshore oil and gas contracts remains untested by the PRC courts, as disputes relating to China’s offshore oil and gas contracts are subject to arbitration.

The general principle of freedom of contract under PRC law would, in theory, allow contracting parties to agree to provide for the liability limitation and/or exclusion as between themselves.  There are however important exceptions to this position.

The liability limitation and/or exclusion clauses are void if:

(a)    The liability is for bodily injuries caused to the other party (unless the law otherwise provides); or

(b)   The liability is for the other party’s property damages caused by wilful conduct or gross negligence.  

In the case of a template contract that is prepared by one party in advance, the liability limitation and/or exclusion clauses under such a contract can be void or voidable if the party which provides the template contract fails to draw the other parties attention to such limitations/exclusions and explain the clauses as requested by the other party.

Russia

Situation: Untested

Although the KFK principle is being used in contracts for major offshore drilling and development projects in Russia, these tend to be governed by English law. Under Russian law, however, the general principle is that damage should be compensated by the party which caused it. It is questionable whether parties to a contract can vary this rule and make a contractual arrangement in respect to a non-contractual obligation(s) that may (or may not) occur in the future.

In addition, it should be noted that, in certain circumstances, damage to property and injury to personnel, which are the backbone of KFK regimes, may qualify as a crime.  Therefore, special public rules and regulations are applicable in those cases.

Scotland

Situation: Favourable

KFK contractual regimes are valid but will be strictly interpreted by the courts. Where there is any ambiguity, it will be interpreted against the party seeking to rely on it.

The Scottish courts take a practical, common sense approach to KFK clauses. However, in many cases, the courts have refused to give effect to an indemnity claimed, with the court deciding that the clause does not cover the precise situation giving rise to the claim. It is therefore very important at the negotiation stage to prepare the draft carefully and read it thoroughly to ensure that what you are signing up to is in fact what you want and need.

Singapore

Situation: Favourable

In construing KFK provisions in contract, the usual rules of interpretation apply.  This means that clauses have to be clearly worded and unambiguous.  If there is any ambiguity, the contra proferentem rule that contractual provisions should prima facie be construed against the party who was responsible for the preparation of the contract and/or who is to benefit from the provision applies.

South Africa

Situation: Favourable

KFK clauses will be recognised and enforced by South African courts, as they have been in the 1984 and 1996 Inter Club Agreements, unless doing so in a particular case would be contrary to public policy.

South Korea

Situation: Untested

The validity of KFK contracts has not been tested before the Korean courts. It is anticipated that, in relation to towage contracts, the court would likely recognize the validity of a KFK regime, but it is far less certain in relation to other types of contracts. In addition, consideration has to be given to the possibility that they would be held not to apply in cases of gross negligence or willful misconduct and also whether they may be contrary to public policy.

Sweden

Situation: Untested

Freedom of contract is considered a fundamental principle under Swedish law and provided that the KFK clause is clearly drafted it is likely, at least in a commercial context, to be upheld by Swedish courts.

KFK clauses have not been tested in Swedish courts. Freedom of contract is however considered to be a fundamental principle under Swedish law and provided that the KFK clause is clearly drafted there is reason to believe that (at least in commercial contexts) they would be upheld by Swedish courts.

Under Swedish law, a KFK clause would presumably be tested against Swedish legislation on unfair contract terms. The Swedish Contracts Act contains a provision according to which a clause or a contract may be set aside or amended if the clause or the contract is deemed unreasonable. It is also a widely accepted principle under Swedish law that contractual limitations of liability will not apply in situations of gross negligence or intent (willful misconduct).

The Netherlands

Situation: Favourable

KFK clauses are often incorporated in contracts under Dutch law and have been found by the Dutch courts to be acceptable and not in violation of the general principles of reasonableness and fairness. However, they must be treated on a case-by-case basis.

There have been a number of cases under Dutch law considering the efficacy of KFK clauses, with the Supreme Court recently confirming that a party can rely on a KFK clause and that they are not necessarily unacceptable taking into consideration the general principle of reasonableness and fairness.

There may, however, be circumstances where the Court may consider that invoking a KFK clause would be in violation of the general principle of reasonableness and fairness, an example of which would be when the party invoking the clause had acted intentionally or with gross negligence in causing the incident.

United Arab Emirates

Situation: Untested

KFK clauses have not been tested by the courts in the UAE

The general principle is that parties are free to contract on whatever terms they wish and contractual indemnities are generally recognised, but there are limitations to the extent they are able to limit or exclude liability and this impacts upon the workings of a KFK clause. For example, there is doubt in UAE law as to whether it is possible to limit liability for gross negligence and wilful misconduct.

USA: Alaska

Situation: Untested

KFK indemnity provisions are generally untested but are likely to be accepted by the courts.

There is little case law from West Coast US states in relation to knock for knock regimes. However, the USA generally recognises and upholds the principle of freedom to contract and it is therefore likely that indemnity regimes would be upheld by the Alaskan courts.

USA: Louisiana and Texas

Situation: Mixed

The applicability and enforcement of KFK clauses is uncertain. 

Inconsistent approaches and rationales, not only between states, but also between courts in the same state, leaves little settled in respect of the enforceability of KFK clauses. Each clause must be assessed independently taking into consideration the language of the agreement, the existence of insurance, and the potential applicability of hostile law to determine whether the clause can be relied upon and if that clause will provide any meaningful protection.

USA: Oregeon

Situation: Untested

KFK indemnity provisions are generally untested but are likely to be accepted by the courts.

There is little case law from West Coast US states in relation to knock for knock regimes. However, the USA generally recognises and upholds the principle of freedom to contract and it is therefore likely that indemnity regimes would be upheld be the courts of Oregon.

USA: Washington

Situation: Untested

KFK indemnity provisions are generally untested but are likely to be accepted by the Courts.

There is little case law from West Coast US states in relation to knock for knock regimes. However, the USA generally recognises and upholds the principle of freedom to contract and it is therefore likely that indemnity regimes would be upheld by courts in Washington state.