Knock for Knock agreement and its difficulty to fit in the Spanish legislation

Knock for Knock agreement for maritime activity has its historical origin in London during World War II, where the British merchant ships in the North Sea to prevent attacks from German´s submarine fleet, had to travel at night, with the lights off  in convoy and with a little space between them. As consequence of the navigating conditions lots of collisions were occurred. Ship-owners in order to limit the growing costs, initially availed Knock for Knock, where each part took care of its own costs (damage). With the time, the development of this principle was widely welcomed by the shipping industry especially Off shore activity and towing[1].

The policies BIMCO, Heavycon, Supplytime and Towcon are the ones used nowadays to assign them to the parties involved in the development of towing and offshore projects. This area is exempt from liability where each party assumes its risks (possible costs and compensation for any loss or damage to persons or things) that may incur in its activity and excluding other parties from any claims (own or third parties) that may be contemplated by the participants (or to establish the duty to indemnify in case they can not be avoided) whatever the cause giving rise to the potential claim.

This risk allocation system is used in hiring, under Common Law jurisdiction. It is set by the parties in towing and off-shore projects, as follows[2]:

a) The Owner, in the development of the project or towing, assumes full responsibility for personal losses (injury or death) of its employees, subcontractors. He will also assume the responsibility to indemnify the Contractor for any compensation.

b) The Contractor assumes full responsibility for personal losses while the Project is being developed. This responsibility includes its employees, subcontractors, and also if there are any losses or damaged things, assuming the responsibility to indemnify the Owner for any compensation.

c) It stipulates the applicability of the agreement regardless of any responsibility, either objective or negligence of any kind for both with the resulting cross-indemnification obligation.

To ensure the risk that everyone takes in the Project development, it is usual to hire a insurance system to cover the risk: through Hulls insurance, Protection and Indemnity insurance P & I to 3rd parties. It stipulates the impossibility of giving up the actions by the different parties linked in the Towing or Off shore contract.

There are four exceptions at Common Law where Knock for Knock, clause has no application to regulate liability between Owner and Contractor. These are:

1. Guilt grave / the Fraud (Gross Negligence[3] / Willful Misconduct[4]).

2. The Removal of Wrecks (Wreck removal).

3. Pollution (Pollution).

4. Patrimonial Responsibility of Fixed Platforms (Property liability).

The advantages that this contractual system of liability offers, makes easier for the contracting parties to find the location risk in a clear and predictable way as well as the insurance costs decreases when ensuring personal and economic risks from their own activity. Compensations become effective because there is no waiting time for reporting statements.

In Common Law the contractors have full control of fact, and the freedom of covenants allows parties to generate a different treatment to commercial jurisprudence regulation , where it is perfectly feasible to create a comprehensive system to regulate the treatment of responsibility , limiting or expanding it in terms of contractual needs or purposes to be achieved by the parties as well as the Knock for Knock agreement as system of liability (contract and tort) even if it was born through a willful or a negligent act[5]. Its effectiveness can be deployed without any hindrance.

In Spanish law, it is understood that such a system would have difficulties to fit, because the legal system inspired by Continental (Roman – Germanic), where the parties have lack  of freedom to exclude the application of the legal system if it is not so empowered. The lack of total domination of the act and the freedom of agreements is limited to compliance with the law and Spanish law provides it for the nullity of the covenants ¨ contrary to law, morals or public order ¨ (Art. 1255 C. Civil), prevented by Article 1102 of C. Civil (inability to agree on the exclusion of liability willful action, extending to the gross negligence[6]) and 620 of C. of Commerce (impossibility of exclusion of liability for captain´s owns faults) the effectiveness of those Knock for Knock clauses system providing the limitation of liability for the acts of manslaughter origin, coming from the action itself , as the towing or Off Shore projects.

[1] “The knock for knock principle normally means that each party is only responsible for its own losses regardless of cause and that each party indemnifies the other for liabilities arising out of its own losses”. (“KNOCK FOR KNOCK” clauses IN OFFSHORE CONTRACTS. Wikborg Rein’s Shipping Offshore Seminar in Oslo/Bergen in September/November 2008)

[2] Sulppytime y Towcom, knock for knock:

“1. each party shall be responsible for loss of / damage to and/or death of / injury to, any of its, and/or property / own property / personnel; and /or sub-contractors personnel of its contractors to the other

2. responsibility shall be without recourse of  party and notwithstanding fault or negligence any party;

3. each party shall, in respect of the losses or damages or other liabilities for which it has assumed responsibility correspondingly indemnify party the other”

[3] “English law and the English Courts have a strong tendency to interpret exclusion and indemnity clauses as not covering the results of negligence. This would mean, for example, that Owners might claim against Charterers if the loss of or damage to the vessel were a result of Charterers’ negligence” (Robert Gay, Hill Dickinson. PROBLEMS AND PITFALLS OF THE SUPLYTIME 89 CHARTER, London 2004).

[4] Smit International (Deutschland) GmbH v. Josef Mobius, Bau-Gesellschaft (GmbH & Co) English High Court, Queen’s Bench Division, Commercial Court: Morrison. J: June 2001: Unreported

[5] “At first glance, the knock-for-knock principle is an oddity. It supplants tort litigation providing, instead, a liability regime under which parties bear their own losses. Thus, the knock for knock principle effectively establishes a system of first party insurance” (Gideon Parchomovsky and Endre Stavang.CONTRACTING AROUND TORT DEFAULTS PROPERLY: THE K4K PRINCIPLE AND ACCIDENT COSTS. Yale 2001)

[6] The disclaimer clauses for fraud should be considered inadmissible. It will mean the free commission of an illicit … Article 1102 of C. Civil establishes the renunciation of action to demand a liability for fraud …¨,¨ resignation means all types of agreements or clauses that exonerate the debtor from this responsibility ¨ Diez-Picazo (Introduction to the Theory of Contract , obligatory relations, TECNOS 1970)

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