Supreme Court Construes Charter Party Indemnity

Farstad Supply AS v Enviroco Ltd and another (The MV Far Service) [2010] UKSC 18

The litigation in these proceedings originated in the Scottish courts but subsequently went on appeal to the UK Supreme Court who considered amongst other things how the indemnity/ exceptions clause in a charter party governed by English law should be interpreted. It was held that the wording of the indemnity/ exceptions clause was (1) wide enough to exclude the charterer's liability to the owner for damage to the vessel caused by the charterer's own negligence, and (2) that it successfully operated as an indemnity clause in respect of claims by third parties. In the words of Lord Mance, the language of the relevant clause "operates as a series of indemnities against third party exposure combined with exclusions of direct exposure to the other contracting party. This is both what the heading of clause 33 and what common commercial sense would lead one to expect under a scheme clearly intended to divide risk between the contracting parties."

Background

In 2002, an oil rig supply vessel called the Far Service was damaged by a fire whilst berthed in Peterhead harbour. The owner of Far Service was a company called Farstad and they had chartered the vessel out to Asco who in turn had engaged another company called Enviroco to clean out some of the vessel's tanks. During the cleaning process, Asco instructed the Master to start up the engines so that the vessel could shift berths. At the same time, an Enviroco employee inadvertently opened a valve, releasing oil into the engine room. The oil ignited due to the hot condition of the engines and there was a fire which caused serious damage.

Farstad sued Enviroco in tort. Enviroco denied liability but they said that, even if they were liable, the fire was materially contributed to by the negligence of both Farstad and Asco. Consequently, Enviroco brought in Asco as a third party, arguing that if it were liable to Farstad, it would be entitled to a contribution from Asco under the relevant Scottish legislation. However, the charter party between Asco and Farstad contained an indemnity / exceptions provision, the relevant part of which states as follows:

"33.5...the Owner shall defend, indemnify and hold harmless the Charterer, its Affiliates and Customers from and against any and all claims, demands, liabilities, proceedings and causes of action resulting from loss or damage in relation to the Vessel (including total...