Indemnity Versus Exclusion

In the recent case of Farstad Supply A.S v Enviroco Limited

and ASCO UK Limited [2009] CSIH 35, the Inner House of the

Court of Session considered law on contributory negligence and the

operation of section 3(2) of the Law Reform (Miscellaneous

Provisions) Act 1940 and its relationship with contractually agreed

indemnity clauses. The Court examined the operation of one

particular indemnity clause and considered whether it excluded

liability on the part of the indemnified party or if it simply

allocated who should bear the cost of any liabilities which

arose.

Background

The MV Far Service, an oil rig supply vessel owned by Farstad

Supply AS ("Farstad") and chartered by

ASCO UK Limited ("ASCO"), was berthed in

Peterhead Harbour in July 2002. ASCO instructed Enviroco Limited

("Enviroco"), to clean out the holding

tanks of the vessel. As the cleaning was coming to an end an ASCO

representative spoke to the master of the vessel (for whom Farstad

were liable) about moving from the berth, following which the

master of the vessel started the engines and prepared to move.

Unfortunately an Enviroco employee had unintentionally opened a

valve which released hot oil into the engine room near hot

machinery causing the oil to ignite and start a fire. An employee

of Enviroco was killed and the vessel was badly damaged.

The issues

Farstad raised an action against Enviroco in respect of the

damage to the vessel caused by the negligent acts of Enviroco

employees when cleaning. Enviroco sought to bring ASCO in as a

third party to the action, claiming that ASCO were partly

responsible for the damage caused due to their failure to supervise

the cleaning operations and for giving an order to move the vessel

before the cleaning had been completed. Enviroco sought to recover

sums from ASCO for contributory negligence by virtue of section

3(2) of the Law Reform (Miscellaneous Provisions) Act 1940

("the 1940 Act") which states that

"Where any person has paid damages...in which he has been

found liable in any such action aforesaid, he shall be entitled to

recover from any other person who, if sued, might also

have been held liable in respect of the loss or

damage on which the action was founded, such contribution, if any,

as the court may deem just."

However the Charter Agreement between Farstad and ASCO contained

the following indemnity clause; "...the Owner shall defend,

indemnify and hold harmless the Charterer...from and against any

and all claims, demands...