"Knock-For-Knock Indemnities" And Their Application For Work In Or Offshore Brazil

Roberto di Cillo
Posted: 08/21/2011

While in some parts of the Anglo-Saxon world (especially in some U.S. states and in the U.K.) it is common for parties to allocate risks and liabilities in contracts relating to oil and gas exploration and production by adopting relatively standard boiler-plate generally accepted language, Brazil is a witness to a certain level of resistance, perhaps as a result of the lack of knowledge of the concept or perhaps as a result of the uncertainty as to the reception of the concept if it is transplanted from other laws.

It is very true that the Anglo-Saxon culture, in general, favors adoption of approaches which are not expressly prohibited by law. It is probably a reasonable argument that this has been particularly successful in light of a lack of litigation at the appropriate venues.

Lack of litigation in Brazil is perceived mostly as fuel for uncertainty and if there is uncertainty some will stand up and argue that there is "something against the law", which is really not exactly true in many cases.

In fact, experience in the Anglo-Saxon world shows that there is really no uniformity as to the legality of exclusion of liabilities of a party in the event of that party’s contributory negligence, gross negligence (howsoever defined, if defined) or willful misconduct (ditto).

There is really no uniformity either as to the definition of simple negligence or gross negligence, and the latter may not even be an existing concept in some jurisdictions. However, this does not mean that exclusions of liabilities under certain laws are absolutely against the law!

Some may say in Brazil that under Brazilian law parties are barred from adopting standards which depart from statutory standards out of a concern of a potential infringement of Brazil’s public policy.

It is widely known that this – public policy - is an existing concern under certain common law jurisdictions as well and that alone has historically not prevented talented attorneys working outside of Brazil in non-Brazilian transactions from writing contracts which should not reasonably be found in conflict with other jurisdictions’ public policies.

Even if there were realistic public policy restrictions or limitations in Brazil, those advocating against the freedom to contract around this concern should take a look at the type of rights which can be subjected to arbitration under the Arbitration Act of 1996 (known locally as Lei 9.307, de 23 de setembro de 1996), which literally says that arbitration can be chosen for resolution of disputes on "direitos patrimoniais disponîveis" (and perhaps the correct translation for this is "alienable rights"), which are clearly outside of any public policy restriction or limitation. In any event, who defines public policies? In a network society it should not be the Administration or the Legislative only!

Except in the relationship of two international players (or their local subsidiaries) Brazil has witnessed a lack of the use of an opportunity which is very widely used in the oil and gas industry internationally, that is, allocation of liabilities (and giving of indemnities) by the parties in contract, notwithstanding:

(a) negligence

(b) gross negligence or

(c) willful misconduct of any of the parties and notwithstanding any right under statute or otherwise.

Even if this is something that can be successfully (and ultimately) challenged at the appropriate venue (and let’s keep in mind that offshore operations in exploration and production of oil and gas are most common in Brazil beyond the 12 nautical miles limit), this approach tends to save companies time and resources (including, but not limited to, scarce human resources) during the term of contracts, where time and resources could be used otherwise in order that the parties can focus on their specific core businesses.

How to provide for an adequate level of enforcement of the parties free right of allocation of liabilities deserves more development and that should be covered separately.

Roberto di Cillo
Posted: 08/21/2011

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