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 by Enviroco could be apportioned with ASCO. Whatever damages Enviroco recovered from ASCO, ASCO could call upon Farstad to indemnify them.

The decision was an equitable one – ASCO and Farstad were bound by the terms of what they had freely contracted for which meant that Farstad would receive reduced damages and Enviroco's liability could be reduced by the amount of fault attributed to ASCO's actions.

The court's discussion helpfully sets out the differences between "exclusion" and "indemnity" clauses and is a reminder of just how important it is to take care in drafting commercial contracts.