Indemnity Versus Exclusion - Supreme Court Decision

The Supreme Court recently overturned the decision of the Inner House of the Court of Session in the case of Farstad Supply AS v Enviroco Limited and another [2010] UKSC 18. The case concerns the interpretation of section 3(2) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1940 ("the 1940 Act"), and how it relates to contractual indemnities.

The court considered the wording of an indemnity clause of the sort typically found in North Sea oil and gas contracts, and found that the clause in question actually served as an exclusion of liability as well as an indemnity, overturning the Inner House decision that the clause was an indemnity clause and not an exclusion clause. The decision has a particular impact on parties in the supply chain which are not protected by indemnities, for the reasons explained below.

Background

Farstad Supply AS ("Farstad") was the owner of the MV Far Supply, an oil supply vessel, which was chartered to ASCO UK Limited ("ASCO"). The Far Supply was berthed in Peterhead harbour, and was undergoing works to remove residue from the holding tanks, which were carried out by Enviroco Limited ("Enviroco"). On ASCO's instructions, the master of the vessel started the engines to move to another berth. However, an Enviroco employee had left a valve open, releasing oil onto the engine room floor. The oil ignited and the resulting fire killed an Enviroco employee and damaged the vessel.

Farstad sued Enviroco in negligence. Enviroco in turn sought to bring ASCO in as a third party, contending that the fire was materially contributed to by ASCO's negligence in instructing the master of the vessel to start the engines before cleaning had finished. Enviroco sought to recover sums for contributory negligence under section 3(2) of the 1940 Act, which reads:

Where any person has paid any damages or expenses in which he has been found liable in any such action as 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. This would have been straightforward, but for the following clause included in the charter agreement between Farstad and ASCO:

... 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...