Knock-for-knock clauses are designed for use in commercial contracts when the parties intend that they shall each be responsible for loss or damage to their own property, and any liability to third parties, irrespective of fault as between the contracting parties.
Such clauses are routinely incorporated into standard form charterparties, such as BIMCO's Towcon 2008. Towcon 2008 incorporates knock-for-knock terms at clause 25(b). The clause operates to provide (i) a set of mutual exclusion and exemption clauses that provide the Hirer and the Tugowner with a contractual defence to claims for loss or damage and (ii) mutual indemnities for liability to third parties.
This blog examines whether, under English law, the Tugowner can be exempted from all liability to the Hirer irrespective of the circumstances and the nature of the Tugowner's breach.
Towcon 2008 clause 25(b)(ii) provides:
"The following shall be for the sole account of the Hirer without any recourse to the Tugowner, his servants or agents, whether or not the same is due to any breach of contract (including as to seaworthiness of the Tug), negligence or any other fault on the part of the Tugowner, his servants or agents:
- Loss or damage of whatsoever nature, howsoever caused to or sustained by the Tow.
- Loss or damage of whatsoever nature caused to or suffered by third parties or their property by reason of contact with the Tow or obstruction created by the presence of the Tow.
- Loss or damage of whatsoever nature suffered by the Hirer or by third parties in consequence of the loss or damage referred to in (1) and (2) above.
The Hirer will indemnify the Tugowner in respect of any liability adjudged due to a third party or any claim by a third party reasonably compromised arising out of any such or loss or damage..."
The extent of the Tugowner's protection from liability was considered in A Turtle Offshore SA v Superior Trading  1 Lloyd's Rep 177. In that case, a tug was engaged in an oceanic tow of a drilling unit pursuant to Towcon 1985 that, by clause 18(2)(b), incorporated materially the same wording as that provided by clause 25(b)(ii) of Towcon 2008. During the tow, the tug ran out of fuel and disconnected from the drilling unit, which was subsequently lost.
Mr Justice Teare ("Teare J") accepted the Hirer's argument that a Tugowner cannot be shielded from liability for all conceivable breaches and held that the protection is available only "so long as the tug owners are actually performing their obligations under the TOWCON, albeit not to the required standard" [para 116].
On the facts before him, Teare J ultimately found against the Hirer. However, it is submitted that A Turtle is good authority for the proposition that a failure by the Tugowner to perform its overriding obligations under Towcon 2008 is a breach capable of rendering it liable for loss or damage suffered by the Hirer as a result of that breach. In other words, when taking into account the purpose of the Towcon as a whole, there are some breaches that can fall outside of the scope of the knock-for-knock clause.
While some commentators have queried how loss or damage arising in these circumstances can be distinguished from the apparent all-encompassing wording of clause 25(b)(ii), it is relevant that the majority have referred to Teare J's decision without criticism. Moore-Bick LJ has also mentioned it with apparent approval in Transocean Drilling UK Ltd v Providence Resources Plc  2 Lloyd's Rep 51, [Para 33]; a case concerning a mutual knock-for-knock regime.
Breach falling outside of an exception clause is not a modern concept. In A Turtle, Teare J referred to The Cap Palos  P 458 and a passage on appeal by Lord Sterndale MR, that reads:
"I think that the whole clause points to the exceptions being confined to a time when the tug owner is doing something or omitting to do something in the actual performance of the contract, and do not apply during a period when, as in this case, he has ceased even for a time to do anything at all and left the performance of his duty to someone else. In other words, I think the exception extends to cover a default during the actual performance of the duties of the contract, and not to an unjustified handing over of these obligations to someone else for performance."
The words "unjustified handing over" are submitted as the basis of the test for determining whether a Tugowner has failed to perform its obligations under the Towcon as a whole; those obligations being expressly incorporated in clause 2 of Towcon 2008, that reads: "The Tugowner agrees to render the service(s) to the Tow as set out in Box 22."
It is submitted that any handover that is determined to be unjustified amounts to an abandonment of the services and thus a breach outside of the knock-for-knock regime.
In assessing the justification of the handover, guidance can be drawn from The Law of Tug and Tow and Offshore Contracts Third Edition as follows:
"The overriding obligation upon the tug imposed at common law is to stay with the tow and to persevere in the completion of the towage service...[para 2.53]
Interruptions to a towage service are common... In all such cases, the obligation on the tug is the same: to return as soon as possible to the tow, to effect the reconnection of the tow-line and to resume and complete the towage. If this cannot be done, or if the circumstances of the interruption of the towage are such that the service cannot be performed or contemplated, the tug must not leave the tow until she is in a safe place [para 2.54].
If this analysis is correct, then, in order to be protected by the knock-for-knock clause, the Tugowner will have had to have used its best endeavours to complete the services failing which to have preserved the tow in a safe place.
In A Turtle, Teare J held that the Tugowner did not commit a breach, when it disconnected from the tow, on the basis that the tug master feared for the safety of the tug while still connected to the tow; the circumstances being that the tug had or was imminently about to run out of fuel. Had the fuel not been an issue, it is submitted that Teare J may have found that the Tugowner failed to exercise best endeavours and, unless the drilling unit was disconnected in an ostensibly safe place, that the Tugowner would have been liable for the loss of the drilling unit that nonetheless resulted.
The question of disconnection in a safe place did not arise in A Turtle. However, it is submitted that a safe place must be a location in which, absent any reasonably unforeseeable event, the tow will be preserved until the Tugowner is able to arrange for completion of the services. If the services are expressed to include multiple tows, it follows that preservation of each would be an overriding obligation of Towcon 2008.
It is not uncommon during oceanic towage operations for an escort tug to be employed to monitor the draughts of the tow(s), particularly given the risk of severe conditions and the significant distances from ports of refuge. In cases where an escort tug is not sufficiently equipped or powerful to preserve the tow(s), it follows that handover of the tow(s) to such an escort tug is unlikely to be considered a safe place; the likelihood diminishing further the more severe the conditions and the greater the distance from a port of refuge.
A Tugowner contracting on a standard form charterparty, such as Towcon 2008, should therefore be mindful of the risk that failing to comply with its overriding obligations could be treated as tantamount to an abandonment of the services and thus a failure to perform (at all, let alone to the required standard). Any such failure that causes loss or damage to the Hirer may, therefore, be a breach falling outside of the knock-for-knock clause rendering the Tugowner liable for the loss or damage to the Hirer that results.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.