Preface

 The Chinese Supreme People's Court released the 2022 Analysis of Outstanding Cases of National Court System recently. The Dispute over Ocean Towage Agreement between P Insurance Company and N Salvage Bureau handled by WJNCO lawyers won the second prize in the civil case category. This dispute centered on the validity of the “Knock for Knock Clause” in the Ocean Towage Agreement and Chinese courts at both hierarchies finally ascertained that this clause was legal and valid.

Case Summary and Abbreviate of Adjudication

In October 2016, B Company(“the Towed Party”) as the owners of Vessel T entered into an Ocean Towage Agreement with N Salvage Bureau (“the Tug Operator”), entrusting the Tug Operator to perform towing services for the Vessel T to escape from typhoon. The agreement provides for liability and exclusion of liability, i.e. the Tug Operator shall be solely responsible for the loss of and damage to the tug and its related properties and related expenses, whether or not due to the negligence or any fault of the Towed Party, and shall have no recourse against the Towed Party; and vice versa, the Towed Party shall be solely responsible for the liability of the tug and its related properties, whether or not due to the negligence or any fault of the Tug Operator, and shall have no recourse against the Tug Operator.

During towing, due to bad weather and sea conditions, the main towing cable broke twice, and then after several unsuccessful attempts to pick up the tow, Vessel T drifted to a nearby reef and was stranded. 2 months later, Vessel T was successfully refloated, causing damage to Vessel T. After the insurance company paid insurance compensation to the Towed Party, the insurance company subrogated to the Tug Operator. In the process of recovery, the insurance company claimed that the liability exclusion clause (“Knock for Knock Clause”) specially agreed in the Ocean Towage Agreement was a format term, which violated the mandatory provisions of the Maritime Code, and the Tug Operator was grossly negligent in the occurrence of the accident, so the “Knock for Knock Clause” was invalid, and the Tug Operator should be liable for the damages according to its degree of fault. Our firm represented the Tug Operator and argued that the liability exclusion clause agreed in the Ocean Towage Agreement was legal and valid, which was a common and widely recognized industry practice in the international towing market, and the Tug Operator was entitled to claim exclusion of liability.

The courts of first and second instance held that the parties could agree on their own liability for damages that might occur in the course of towing at sea, and only when the Towage Agreement did not agree or did not agree differently, liability for negligence would apply; if the Tug Operator did not have intentional or gross negligence, the “Knock for Knock Clause” agreed between the Tug Operator and the Towed Party was legal and valid, and the Tug Operator could be exempted from liability for negligence based on this clause.

The Validity of “Knock for Knock” Clause

Whether it is a format clause

“Knock for Knock Clause” is considered by BIMCO to be a core principle in structuring a Supplytime. The meaning of this clause is usually that the contracting parties are responsible for the loss of their own property, personal injury or death, even if such property loss, personal injury or death is caused by the act, omission or breach of contract of the other party, and vice versa. Therefore, the essence of the “Knock for Knock Clause” is that the parties share the risk and responsibility by mutually agreeing on a number of exempted matters (and non-excludable matters) to replace the original fault-based liability.

Terms of international standard towage agreement, such as the International Ocean Towage Agreement Daily Hire format (“TOWHIRE”) recommended by the International Salvage Union (“ISU”), the European Association (“ETA”) and the Baltic and International Maritime Council (“BIMCO”) in 2008 (…Loss or damage of whatsoever nature, however caused to or sustained by the Tow, shall be for the sole account of the Hirer without any recourse to the Tugowner, his servants or agents…) and the Lump Sum format (“TOWCON”) both include the “Knock for Knock Clause”. Are these standard contractual clauses “format clauses” as defined in Article 496(1) of the Civil Code, which are pre-drafted for repeated use and are not negotiated with the other party at the time of concluding the contract?

In this case, the judge held that BIMCO is one of the most influential non-governmental organizations in the shipping industry in the international arena, and the standard contractual clauses formulated by BIMCO are only for the reference of its members, which are not mandatory and are the basic clauses of the parties’ autonomy of will, which can be added or subtracted after negotiation by the parties, and are different from the format clauses designated by the monopoly party as mandatory for the other party to apply.

Therefore, in terms of the “Knock for Knock Clause” itself, it is not a format clause, and the parties to the contract can refer to use it, but whether to use it in the contract still depends on the autonomy of the parties.

Whether there is violation of the mandatory provisions of the Maritime Code

Article 162(1) of the Maritime Code provides for the principle of “negligent liability” for the apportionment of liability between the Tug Operator and the Towed Party in ocean towage, that is, if the losses are suffered by the Tug Operator or by the Towed Party as a result of a mistake by one party, the party which made that mistake shall bear liability for compensation; if the losses are suffered as a result of mistakes by both parties, each party shall bear liability for compensation pursuant to the proportional degree of its mistake. Article 162(2) further provides that, in spite of the provisions of the above paragraph and subject to proof by the tug operator, the tug operator shall not bear liability for compensation of losses suffered by the Towed Party which are incurred due to any of the following reasons: (1) mistakes made during the operating or administering of the tug by the Master, crew members or pilot of the tug or employees or agents of the Tug Operator; (2) mistakes made when the tug is engaged in salvage or seeking to rescue human life or property.

Then, should the “Knock for Knock Clause” be null and void for violating the provisions of the Maritime Code on the allocation of liability for towage? The judges of first and second instance held that Article 162(3) of the Maritime Code clearly stipulates that the fault liability clause in Article 162(1) and Article 162(2) shall apply only when there is no agreement or no different agreement in the contract. Therefore, this article stipulates the principle of contractual agreement taking precedence under the fault liability of the towage agreement. According to the meaning of the text, if the contract between the Tug Operator and the Towed Party has reached a clear agreement on how to bear the liability for damages, the contractual agreement shall apply first, and the provisions of this article shall only apply when there is no agreement or no different agreement in the Ocean Towage Agreement.

In addition, according to the provisions of Article 162(2) of the Maritime Code and its legislative spirit, the parties have the right to agree and apply the liability exclusion clause in the Ocean Towage Agreement. In other words, the “Knock for Knock Clause” agreed by the Tug Operator and the Towed Party is the autonomy of the parties regarding the determination of liability and risk sharing, which does not violate the provisions of the Maritime Code and is also in line with the legislative spirit of promoting the smooth implementation of towing operation and protecting the rights and interests of all parties to the greatest extent possible.

Whether to apply the provisions of the Civil Code on validity of contracts

Article 506 of the Civil Code stipulates the circumstances where the exclusion clause in a contract is null and void: “(1) those that cause personal injury to the other party; or (2) those involving property damage to the other party as a result of deliberate intent or gross negligence.” Based on the legal application principle of “lex specialis derogat legi generali (special law prevails over general law)”, the provisions of general law shall apply when there is no provision of special law. To examine the validity of the “Knock for Knock Clause”, is it necessary to consider the provisions of the Civil Code on the invalidity of the liability exclusion clause? In this case, the judge of first instance held that since the Maritime Law had clearly stipulated the liability for negligence, according to the principle of “special law prevails over general law”, the liability exclusion clause of the Ocean Towage Agreement should not apply to the provisions of the Contract Law (note: the contract was still valid when the accident in question occurred and the case was heard), so there was no need to consider the provisions of the Contract Law (the current Civil Code).

Conclusion

In marine towage, the towed object is directly exposed to the risk of the sea, and the towage operation itself also increases the difficulty of the ship's maneuvering, therefore, the risk that the Tug Operator has to bear for the towed object is much higher than the risk that the Marine Carrier has to bear for the transported goods. In addition, there is a special feature in the marine towage industry that the value of the towed goods is usually tens of millions or even over hundreds of millions, while the towage fee is less than one-tenth or even one-hundredth of its value. If the industry’s risk sharing system, which was formed after a long time of development, is broken arbitrarily, it will not only disturb the normal development of the domestic towage market, but also does not conform to the usual practice of the international towage market. The judgment of the courts of first and second instance in this case recognized the validity of the “Knock for Knock Clause”, which respects the practice of the international towage market and has positive significance for the development of the domestic towage market.

Author: Qiao Jing/Song Jia