The Applicability and Legal Effect of the Knock-for-knock System

Nasser Ajine

Student thesis: Master thesis

Abstract

This master’s thesis regards the application of the knock-for-knock-system under Danish law. The system is generally accepted in the oil and gas industry and is significantly different from the regular system for liability for damages. This thesis investigates the limits of the legal applicability of the system under Danish law and concludes that several factors decide whether the courts will dismiss the application of the Knock-system in favour of Danish liability rules.
It is found that in the eyes of the court, there are three routes to dismiss the Knock-system under Danish law: 1) contesting that the Knock-system was adopted to by the parties, 2) interpreting the content and legal consequence of the clause differently than intended, and 3) dismissing the clause by ruling it invalid.
The thesis concludes that adoption of the system is less likely to be dismissed by the courts if 1) the parties are large firms, 2) the clause has been highlighted, 3) the clause has not been ‘hidden’ in terms that are merely attached to the main agreement, and 4) the clause is normal in the industry, and will we even harder to dismiss if it is adopted in general by industry associations.
The thesis concludes that the interpretation of the clause is most likely to be remain unchanged by the courts if 1) both parties involved have contributed to the wording of the clause, and 2) the clause is ‘fleshed out’ beyond reasonable interpretation.
The thesis concludes that the system is generally unlikely to be deemed invalid for sheer invalidity ‘unfairness’, especially when parties are large, and when not exposed to dismissal on the grounds mentioned above.
The economic analysis in this thesis suggests that regulating the applicability of the Knock-system can reduce risk of dismissal by the courts, but concludes that a more efficient option is available in the form of the actors and industry organizations adopting general terms, model contracts or model clauses in the term of collectively agreed documents in the industry. This will nearly eliminate the risk of the knock-system being dismissed save for third-party-interests not being covered.
Acknowledging that the market would’ve thought of this itself and acknowledging that this hasn’t occurred yet, the thesis suggests that the deselection of court proceedings in favour of arbitration may be the reason, and that arbitration may in fact be the best currently available option for optimizing relational rent and minimizing dispute resolution costs.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2020
Number of pages81
SupervisorsKim Østergaard & Henrik Lando