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Tuesday, 11 March 14
HOLD HARMLESS CLAUSES ARE NOT ALWAYS MUTUAL! - ITIC
 KNOWLEDGE TO ELEVATE
ITIC provides an insurance related contract review service to all of its members. As the leading professional indemnity insurer for the offshore and hydrographic sector, we are often asked to review contracts which contain a mutual hold harmless or knock for knock clause. We are usually told that the presence of this clause in a contract means the risk of a claim is either significantly reduced or even non-existent! No contract is completely risk free. However, if the clause is worded carefully, and is balanced between both contracting parties, it is good contractual risk management and can help to reduce the chance of a successful claim of negligence against you.
A mutual hold harmless indemnity regime provides that each party to the contract agrees to take responsibility for, and to indemnify the other, against injury and loss to its own personnel and property and its own ‘consequential losses’. This is intended to be effective even if the accident and related losses are caused by negligence.
The mutual hold harmless clause in the LOGIC standard form contracts, does seek to create balance. However, in many of the contracts we review, the party with the greater bargaining power will naturally seek to swing the balance back to their favour. Consequently, there are a number of pitfalls to consider. We shall provide a few of these below. This shall be viewed from an English law and a professional indemnity insurance perspective.
Insurance
First, when asked to review contracts with a mutual hold harmless clause, ITIC would suggest that your other insurers are notified. Potentially you are signing away the recovery rights of both your property and employers’ liability insurer. Therefore, you should seek authority from them before signing a contract containing a mutual hold harmless clause.
They may not be mutual
It is staggering how often we see contracts where “the consultant shall indemnify the company against any and all losses,” but there is no reciprocal benefit to the consultant. Furthermore, the clause can be more beneficial to one party, as one side may be carrying out all of the work, using only their employees and property. The clause should be read carefully to ensure there is a mutual provision.
Third party damage
The mutual hold harmless clauses seen by ITIC, although setting out the losses suffered to the property or employees of the contracting parties, will often leave the distribution of third party liabilities unclear. If, for example, you act as a hydrographic consultant on a survey vessel, you should be protected from third party claims arising from the operation of the vessel. The consultant should not be responsible for potentially multi-million dollar pollution liabilities, or collision damages to third party property. These should fall upon the party who has insurance for these liabilities, such as the vessel’s protection and indemnity or hull and machinery cover.
Gross Negligence
The hold harmless regime provides that neither party shall be liable to the other even where the loss occurred is due to the negligence of one party. However, in some cases we see the clause is amended to state this does not apply in instances of “gross” negligence. Therefore, if one of the parties is found to be grossly negligent they will not be held harmless. This might be fine if the contract was pursuant to Norwegian or US law.
Unfortunately, there is no true concept of gross negligence under English law. You should always operate under the assumption that you are negligent or you are not. Baron Rolfe, in - Wilson v Brett (1843) - stated that he “could see no difference between negligence and gross negligence; that it was the same thing, with the addition of a vituperative epithet.” In other words “gross” did not add anything to the standard negligence test. That being said, if gross negligence is included in a contract, a tribunal will attempt to interpret it. The leading decision comes from Lord Mance in - The Hellespont Ardent (1997) – in which he found that gross negligence: is “conduct so seriously negligent that the defendant should not be entitled to rely on the exemption clause.” He further added that it is “very much a matter of degree and judgment,” and, “all the circumstances must be weighed and balanced.” It should be pointed out that Lord Mance was interpreting a contract pursuant to New York law. Therefore, his words are not binding, and his interpretation on gross negligence may not be followed by subsequent tribunals.
The line between negligence and gross negligence can become blurred, and cases will turn on the facts and expert evidence. Moreover, tribunals may have differing opinions on how to apply the test against the facts, reaching differing decisions. On balance, the inclusion of gross negligence within a hold harmless clause in a contract pursuant to English law can lead to uncertainty and increased litigation costs.
Finally, it is understandable that contracting parties do not want the other to rely on a hold harmless clause, as a shield for reprehensible behaviour, beyond the ordinary test of negligence. However, as the line is blurred between that of negligence and gross negligence, a more delineated position to take, is between that of wilful default/misconduct and negligence.
Indirect damages
A further and final point we see, is how consequential or indirect losses are defined in the mutual hold harmless clause. It is usual that these losses are excluded under contract. However, the distinction between indirect and direct loss can be complicated. The famous case of Hadley v Baxendale [1854] found that direct losses were those which arise naturally from the breach of contract, and is therefore foreseeable and recoverable. Whereas, indirect losses were recoverable, but only if they were reasonably foreseeable by both parties, as a possible result of a breach, at the time of contracting.
A common misconception is that all “loss of profits” are indirect losses. This is wrong. Loss of profits can be either direct or indirect, depending on the facts of the case. The following is taken from the hold harmless clause of a contract we have reviewed recently:
“ The consultant nor the company shall be liable to the other… for any consequential indirect damage, that may be suffered by the other.”
This clause could pose problems in the event of a claim, as it only excludes “consequential indirect damages.” Following Hadley v Baxendale, dependant on the facts, loss of profit can either be a direct or indirect result of the breach. If, for example, a consultant was providing design work for sub-sea equipment and carried out the design negligently, not only could this cause damage to property, but also lost drilling time, leading to lost revenue and profit. In this example, a tribunal could find the loss of profit arose naturally from the breach, and therefore, is a direct loss not excluded under the above hold harmless clause. Taking into account the current day rates of drill rigs, this could form a substantial part of any claim.
The clause should be amended to state loss of profits are excluded, whether direct or indirect.
Conclusion
ITIC’s advice is that you carefully review your hold harmless clauses to ensure that they are actually mutual and of benefit to you.
Source: ITIC / Hellenic Shipping
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- Straits Asia Resources Limited - Singapore
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- Meralco Power Generation, Philippines
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- Electricity Generating Authority of Thailand
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- The University of Queensland
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- Offshore Bulk Terminal Pte Ltd, Singapore
- Gujarat Mineral Development Corp Ltd - India
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- Romanian Commodities Exchange
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- CNBM International Corporation - China
- Chamber of Mines of South Africa
- SMC Global Power, Philippines
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- Bhushan Steel Limited - India
- Africa Commodities Group - South Africa
- The State Trading Corporation of India Ltd
- Indian Oil Corporation Limited
- Baramulti Group, Indonesia
- Gujarat Sidhee Cement - India
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- Altura Mining Limited, Indonesia
- Trasteel International SA, Italy
- Rashtriya Ispat Nigam Limited - India
- IEA Clean Coal Centre - UK
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- Indian Energy Exchange, India
- Timah Investasi Mineral - Indoneisa
- ICICI Bank Limited - India
- Sindya Power Generating Company Private Ltd
- Makarim & Taira - Indonesia
- Interocean Group of Companies - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- GAC Shipping (India) Pvt Ltd
- GVK Power & Infra Limited - India
- Ministry of Transport, Egypt
- Latin American Coal - Colombia
- Bayan Resources Tbk. - Indonesia
- Intertek Mineral Services - Indonesia
- Renaissance Capital - South Africa
- Goldman Sachs - Singapore
- Vedanta Resources Plc - India
- Bahari Cakrawala Sebuku - Indonesia
- Sical Logistics Limited - India
- Directorate General of MIneral and Coal - Indonesia
- Manunggal Multi Energi - Indonesia
- Borneo Indobara - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Orica Australia Pty. Ltd.
- Kartika Selabumi Mining - Indonesia
- Grasim Industreis Ltd - India
- Petron Corporation, Philippines
- Aboitiz Power Corporation - Philippines
- VISA Power Limited - India
- Australian Commodity Traders Exchange
- Australian Coal Association
- Metalloyd Limited - United Kingdom
- Bulk Trading Sa - Switzerland
- White Energy Company Limited
- Tamil Nadu electricity Board
- Bukit Baiduri Energy - Indonesia
- Eastern Energy - Thailand
- SN Aboitiz Power Inc, Philippines
- ASAPP Information Group - India
- Energy Link Ltd, New Zealand
- Formosa Plastics Group - Taiwan
- Chettinad Cement Corporation Ltd - India
- London Commodity Brokers - England
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- Indonesian Coal Mining Association
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- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Minerals Council of Australia
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- Asia Pacific Energy Resources Ventures Inc, Philippines
- Gujarat Electricity Regulatory Commission - India
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- MS Steel International - UAE
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- Pendopo Energi Batubara - Indonesia
- Merrill Lynch Commodities Europe
- Kohat Cement Company Ltd. - Pakistan
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- Salva Resources Pvt Ltd - India
- Malabar Cements Ltd - India
- Coastal Gujarat Power Limited - India
- Wilmar Investment Holdings
- Eastern Coal Council - USA
- Banpu Public Company Limited - Thailand
- Ministry of Finance - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Meenaskhi Energy Private Limited - India
- CIMB Investment Bank - Malaysia
- Central Electricity Authority - India
- Deloitte Consulting - India
- Attock Cement Pakistan Limited
- Anglo American - United Kingdom
- Standard Chartered Bank - UAE
- Kepco SPC Power Corporation, Philippines
- Karaikal Port Pvt Ltd - India
- Bharathi Cement Corporation - India
- SMG Consultants - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Agrawal Coal Company - India
- Dalmia Cement Bharat India
- IHS Mccloskey Coal Group - USA
- Ambuja Cements Ltd - India
- Samtan Co., Ltd - South Korea
- Videocon Industries ltd - India
- Larsen & Toubro Limited - India
- Sojitz Corporation - Japan
- OPG Power Generation Pvt Ltd - India
- Directorate Of Revenue Intelligence - India
- Indika Energy - Indonesia
- Toyota Tsusho Corporation, Japan
- Jorong Barutama Greston.PT - Indonesia
- Heidelberg Cement - Germany
- Xindia Steels Limited - India
- Planning Commission, India
- Global Coal Blending Company Limited - Australia
- The Treasury - Australian Government
- Uttam Galva Steels Limited - India
- Iligan Light & Power Inc, Philippines
- South Luzon Thermal Energy Corporation
- Central Java Power - Indonesia
- Thiess Contractors Indonesia
- Medco Energi Mining Internasional
- International Coal Ventures Pvt Ltd - India
- Globalindo Alam Lestari - Indonesia
- Sree Jayajothi Cements Limited - India
- Therma Luzon, Inc, Philippines
- Neyveli Lignite Corporation Ltd, - India
- Kideco Jaya Agung - Indonesia
- Thai Mozambique Logistica
- Kapuas Tunggal Persada - Indonesia
- Parry Sugars Refinery, India
- Price Waterhouse Coopers - Russia
- PTC India Limited - India
- Alfred C Toepfer International GmbH - Germany
- Ministry of Mines - Canada
- Karbindo Abesyapradhi - Indoneisa
- Leighton Contractors Pty Ltd - Australia
- Rio Tinto Coal - Australia
- Posco Energy - South Korea
- Sakthi Sugars Limited - India
- Cement Manufacturers Association - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Mjunction Services Limited - India
- Economic Council, Georgia
- AsiaOL BioFuels Corp., Philippines
- Mercuria Energy - Indonesia
- Bhoruka Overseas - Indonesia
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