The knock-for-knock system is a contractual system in which the parties to the system agree to cover all their losses through first-party insurance and to dispense with tort liability. The system ensures that each party’s insurance contracts cover losses to both their own assets and employees, and that the first-party insurers cannot seek redress under tort law against parties that are part of the system. Moreover, while the system cannot dispense with tort claims raised by third parties, the system can allocate such risks to the better insured party (e.g., the operator of an oil rig rather than the contractors) through indemnity clauses.
Though liability exclusions are common in the business world, the so-called unqualified knock-for-knock contracts are an example that excludes liability and indemnification for grossly negligent acts or even sometimes for losses caused by willful misconduct. Such exclusions are thought by some academics and judges to be unjust and undermine incentives for precaution. This concern has been heightened after the tragic Macondo and Alpha Piper accidents, both of which caused many deaths, very significant economic losses, and great environmental harm. Whether for fairness reasons or precautionary concerns, courts have sometimes struck down unqualified knock-for-knock clauses, i.e., clauses that exclude liability even for gross negligence. For instance, in a case where a vessel in a grossly negligent manner collided with an oil platform, a Norwegian court set aside the exclusion of liability for gross negligence, arguing that “the lack of precaution was blameworthy and grave … and the lack of precaution could have had far worse consequences”.
The same concern for proper precaution led to Parchomovsky and Stavang’s study in Chapter 3. Their study adopted a skeptical attitude towards unqualified knock-for-knock contracts, especially in countries where it cannot be assumed that public regulation substitutes for tort law in securing a proper incentive for precaution.