Indemnity Versus Exclusion - Supreme Court Decision

The Supreme Court recently overturned the decision of the Inner House of the Court of Session in the case of Farstad Supply AS v Enviroco Limited and another [2010] UKSC 18. The case concerns the interpretation of section 3(2) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1940 ("the 1940 Act"), and how it relates to contractual indemnities.

The court considered the wording of an indemnity clause of the sort typically found in North Sea oil and gas contracts, and found that the clause in question actually served as an exclusion of liability as well as an indemnity, overturning the Inner House decision that the clause was an indemnity clause and not an exclusion clause. The decision has a particular impact on parties in the supply chain which are not protected by indemnities, for the reasons explained below.