Staying Out of SEMS Liability Trouble

I have suspected that SEMS was only about safety for about five minutes before it become about:

  1. Safety;
  2. Liability; and
  3. indemnification.

And not necessarily in that order.

So it was with great interest that I read an article called “The offshore Master Service Agreement” by Andrew M. Stakelum of King & Spalding LLP.   In it, Stakelum says that the standard independent contractor clauses and knock-for-knock indemnity provisions of Master Service Agreements have been around long enough that everyone involved knows how they will be interpreted by the courts.

However,  he says SEMS changes that in fundamental ways.  For one thing, the standard language addressing contractor independence has protected operators from some of the actions of their contractors.  He says

This language evolved from caselaw that generally held an operator was not liable for the negligence of a contractor in performing its work so long as an operator did not have substantial control over the manner and performance of the contractor’s work. This stated intent of the parties, when combined with an operator’s traditional “hands off” approach to contractors, would insulate the operator from a contractor’s negligent operations.

But under SEMS, Operators must take a very hands on approach, for example  dictating that contractors will have policies like Management of Change for their internal decisions.     Suddenly the existing legal interpretations may be open to re-examination.

Mr. Stakelum also says that the BSEE intention to cite contractors for Incidents of Noncompliance (INCs)  substantially changes the liability picture.   In layman’s terms, indemnification agreements usually have exceptions when the contractor is guilty of “gross negligence” and the parties to a lawsuit generally know what that means.   But now BSEE says it will INC a contractor “that engaged in egregious conduct.”    What is that?   It appears that there is no accepted legal standard for egregious conduct.  Future legal cases may change the terms of indemnification agreements.

It is tempting to look at this as the sort of legal navel gazing that keeps lawyers occupied but may not affect the majority of companies.   However, the moment you start changing legal thresholds for indemnification and liability, the insurance companies need to figure out how that affects their coverage and that is likely to cost every company that needs insurance.

Operators and contractors need to analyze how these changes affect their businesses.  In tomorrow’s blog,  I will look at what contractors need to do to protect themselves.

 

 

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