Indemnity Clauses v Exclusion Clauses

This recent case concerned an oil rig supply vessel that was

badly damaged while berthed in Peterhead Harbour.

The charterers of the vessel (ASCO) instructed Enviroco to clean

out some holding tanks. While they were finishing the

cleaning, ASCO spoke to the master of the vessel about moving it to

another location in the harbour and the engines were switched on in

preparation for the move. At the same time, employees of

Enviroco had disconnected their hosepipes, allowing oil to flow

through the pipes used in the cleaning process and into the now hot

engine room. A fire broke out - tragically resulting in a

fatality and badly damaging the vessel.

The vessel owner (Farstad) subsequently brought an action

against Enviroco in respect of the damage caused to their vessel on

the basis that their employees had acted negligently in carrying

out their cleaning duties. Enviroco sought to bring ASCO into

the action on the basis that they were partly responsible for the

damage in failing to supervise the operations while the vessel was

berthed and in failing to take care to avoid damage being caused to

the vessel. The Law Reform (Miscellaneous Provisions)

(Scotland) Act 1940 ("the 1940 Act") allows parties to

seek a contribution from a third party in an action of damages, if

that third party "...might also have been held liable in

respect of the loss or damage..."

However, the Charter Agreement between Farstad and ASCO included

this clause - "...the Owner shall defend, indemnify and

hold harmless the Charterer...from and against any and all claims,

demands, liabilities, proceedings and causes of action resulting

from loss or damage in relation to the Vessel...irrespective of the

cause of loss or damage, including where such loss or damage is

caused by [sic], or contributed to, by the negligence of the

Charterer...". The question the court had to look

at was how this clause affected the 1940 Act coming into

play.

Originally, the court decided that because of the Charter

Agreement, ASCO could not be found liable and therefore Enviroco

could not rely on the 1940 Act. On appeal, however, the

judges looked at whether the clause truly excluded liability or

simply meant that if ASCO were liable for damage, Farstad had to

indemnify them. A 2 to 1 majority of the court found that the

clause was really an indemnity clause.

The Charter Agreement did not exclude liability but simply

governed what was to happen where ASCO were liable. As a

result, any amount due...