Towcon 2008 and the coronavirus
5th March 2020
On 11 March 2020 the World Health Organisation designated the Covid 19 virus as a pandemic. We have since received a number of enquiries specifically about where the parties to a TOWCON 2008 contract stand in respect of Clause 27 . This slightly odd clause combines a war risk clause with, effectively, a force majeure clause. An epidemic is one of the listed risks the clause responds to alongside quarantine. A pandemic is of course simply an epidemic that crosses borders.
Before turning to the parts of the Clause that are relevant to the Covid 19 situation, we thought it may be helpful to briefly outline its structure.
The structure of the Clause
Clause 27 is the longest provision in TOWCON, is entitled “War and Other Risks” and is structured in the following way:
Sub-clauses (a) (i) and (ii) contain definitions of what amount to war risks and “other risks” the clause responds to. As well as providing the definition of “other risks” sub-clause (a) (ii) also goes on to provide the Tugowner with a remedy in light of those risks. We will look at this in more detail below as the provision is a tricky one.
Sub-clause (b) provides the Tugowner with the right to refuse to continue or to leave a place where there is an exposure to such risk.
Sub-clauses (c) and (d) deal with war risk insurance and war risk crew bonuses neither of which are relevant to this particular article.
Sub-clause (e) provides the Tugowner with the right to comply with orders from flag state and other official bodies, even if they counteract the agreed details of the contract.
Sub-clause (f) deals with the Tugowner’s rights where there is a risk that the tug may be restricted, blocked or trapped due to such risk, and importantly sets out in what circumstances Delay Payments are due.
Sub-clause (g) provides a duty on the Hirer to renominate a place of destination should the Tugowner be entitled to refuse to proceed to the contractually agreed destination for any cause under the Clause 27.
Sub-clause (h) is a sweep up provision providing that if the Tugowner should exercise his rights per Clause 27 to provide a different service from that originally contracted for (for example if he has to deliver the tug to a new destination), he is deemed to have “fulfilled” his contractual duties – i.e. there is no deviation and he is not in breach of contract.
We shall now look at these in more detail in the context of the current epidemic.
Clause 27 (a) (ii)
This provides the Tugowner with the right to terminate the contract in the event of certain listed risks (defined as “Other Risks”, differentiating them from War Risks) whether those risks are “actual, threatened or reported”. These listed risks include strikes, disturbances, lock-outs and, relevant to the present climate, “quarantine” and “epidemics”.
The provision is oddly drafted inasmuch as it starts off with a list those of risks, outlining in what circumstances rights are triggered as a result (lines 345-352), but then transitions awkwardly at the end of line 352 into provisions outlining the consequent rights of the Tugowner. We anticipate this wording will be tidied up on the revision of TOWCON which is currently underway. A simple amendment to line 352 meantime can be made by adding the words “…in which case...” so that line 352 reads as follows “…without unreasonable delay in which case the Tug may leave the Tow…etc”.
To engage the right to terminate the contract the test is that the actual, threatened or reported risk “would”result in it being “impossible or unsafe or commercially impracticable” for the tug or tow to enter or leave, safely or without unreasonable delay, the place of departure, the place of destination or any port of place of call on the route.
Unlike elsewhere in other of the sub-clauses, 27 (a) (ii), oddly again in our view, does not provide that the assessment of these matters is to be judged on the basis of the reasonable contemplation of the Tugowner or master that such risk “may” expose the tug to danger or delay etc. It is instead an objective standard, namely that the listed risk “would” actually make it impossible, unsafe or commercially impractical to continue. It would follow that a reasonable but mistaken belief that the listed risk would have one of these effects would arguably not suffice. This is a problematic test in itself but additionally awkward because whether there is an actual, threatened or reported risk itself requires a subjective assessment of the situation and how it might develop.
In most situations this higher threshold (i.e. that it “would” make it impossible etc) should make little difference to the outcome if the situation under consideration is fairly clear and develops as predicted.
However, a Tugowner seeking to invoke this clause, where it is uncertain (a) whether the epidemic will materialise to impact upon the voyage at the relevant point and (b) whether that would result in, at the very least, a “commercially impracticable” situation, will need to dance a tricky line. What, for example, if the reported or threatened risk relied upon itself never materialises or if it does, it becomes clear that it would not, with the benefit of hindsight, have impacted upon the voyage? The Hirer, burdened with large expenses for the tow at an inconvenient port en route for example, might decide to challenge the termination as wrongful and seek damages.
A prudent Tugowner may therefore wish to amend the sub-clause in negotiation so that for example it mirrors sub-clause (b) by deleting the words “it would” in line 352 and replacing this with the words “in the reasonable judgment of the Master and/or the Tugowners, it may be…” so that the amended line will read as follows: “… a result of which, in the reasonable judgment of the Master and/or the Tugowners, it may be impossible or unsafe or commercially impracticable… etc”.
When engaged, the sub-clause gives the Tugowner the right to leave the tow at the place of departure or to leave it at an any other place where the Hirer can take back possession of the tow. The contract will be deemed “fulfilled” at that point and the Tugowner will be entitled to all outstanding sums due under the contract as well as compensation for additional costs incurred.
Unfortunately this wording of the sub-clause is also not without ambiguity: for example when compared to the clearer words of Clause 22 (b). All outstanding sums due could mean “due per box 33 at that time” or it could mean “the total lump sum due for fulfilling the contract”. These words have not attracted any attention from the courts yet and so there may be an argument at some point about this.
The better view however is that “all sums due” means only those sums that are earned and due at the time per box 33, and the deemed fulfilment of the contract is used in the same way as in sub-clause (h): it does not mean sums that would become due as if the tow had reached the agreed destination.
What this does flag up nonetheless is the importance of negotiating well-judged stage payments as well as a suitable Delay Payment rate in Box 30. Consider the Tugowner who, after collecting stage payments on mobilisation or departure but is not due the majority of the compensation until delivery on the far side of the planet, has to face a lawful termination only 200 miles short of destination.
Clause 27 (b)
Sub-clause 27 (b) of the TOWCON 2008 provides that the Tugowner cannot be compelled to go to a port or place where his tug may be exposed to the risks described in sub-clause 27 (a) (ii), which includes pandemics (and for that matter a local epidemic). The tug is also given the right to leave any such place that may become exposed to these risks. The clause uses the words “may” which is this context suggests the existence of a current risk or “likely to be” which suggests a future risk, such as an epidemic sweeping from country to country, that is foreseeable.
The rights given to the Tugowner by sub-clause 27 (b) are to be exercised on the reasonable judgment of the master or the Tugowner. This means that unlike the right to terminate per sub-clause 27 (a) (ii) the decision per sub-clause 27 (b) does not have to prove objectively correct. But it must still be reasonable, which means there must be sensible justification for the conclusions that have been reached about the safety of the tug at the time the decision was made. The decision must also be made promptly.
Logically the Tugowner wouId need to take into account relevant government guidelines on safe distancing of personnel and whether that can be complied with for the crew’s safety and whether the jurisdiction being visited is or is likely to be made the subject of a complete shut down, and even then whether, by the time the port is reached, that shut down might be lifted. See also sub-clause 27(e) below in this context. If the tug is scheduled to hand over the tow to a harbour tug with no other physical interaction, after which the tug can depart, there can be little justification for declining to follow orders.
There is a carveout that the Tugowner must still proceed if he has given prior written consent. It might be argued that if, when the contract was signed, all parties were aware of the situation this might amount to consent. Nonetheless to bind, any such written consent would have to be specific to the risk in question and so if material facts change the Tugowner has not lost his rights provided by Clause 27.
Clause 27 (e)
This sub-clause provides the Tugowner with the useful right to comply with “orders, directions, recommendations or advice …” in respect of various listed matters including departure; arrival; routes; ports of call; stoppages or “in any way whatsoever”. Such orders or advice may come from the flag state of the tug, any Government body or similar that has the power to compel compliance.
So for example if the tug’s flag state issues a recommendation that a certain port is currently unsafe and is to be avoided, the tug owner has the express right to follow this advice.
Clause 27 (f)
This sub-clause responds to the risk of the tug having to pass through or near to an area where “after this Agreement is made there is or there appears to be danger of such area being blocked or passage being made hazardous…”
In the context of a pandemic, trapping is more likely to apply rather than a hazard which is usually associated with a physical danger to navigation. This sub-clause only responds to changes in circumstance after the contract has been agreed. The assessment is also a matter of discretion for the Tugowner and there only has to “appear” to be the risk of being blocked. The sub-clause does not expressly say so but a court or tribunal looking at the exercise of this discretion by a Tugowner will still require the decision to be reasonable and based on a sensible risk assessment.
The sub-clause breaks down the adventure into stages and slightly different remedies apply to each, as follows.
Should the tug be blocked or trapped on the way to the place of departure then the Hirer becomes liable for the Delay Payments specified per Box 30. If the delay is more than 14 days, either party then has a right to terminate the contract and all amounts due shall remain payable (Clause 27(f)(ii)). Importantly however for the Tugowner, the Termination Fee under Box 39 and Clause 22(a) is not payable if it is the Hirer that terminates. This is logical because the situation is brought about by reasons beyond the parties’ control rather than for commercial reasons, but may be tough on the Tugowner nonetheless if he has to demobilise back to home port.
If the tug is delayed en route to the destination awaiting a blockage (or a hazard) to clear or forced to take a longer route to avoid this, then the Hirer is liable for delay payments for the extra time taken. There is no right to terminate, however.
If the tug should become trapped whilst on the way to the destination then again delay payments become due daily and there is no right to terminate.
The parties may wish to look at this sub-clause very carefully where for example a port of destination may be closed due to quarantine.
Clause 27 (g)
This sub-clause provides that if the Tugowner has a right per any of the provisions in Clause 27 generally to refuse to proceed to the place of departure or destination then they must “immediately” notify the Hirer and request them to nominate a new place where the tow can be redelivered. The Hirer has 48 hours to make his decision failing which the Tugowner may choose to end the adventure at “any place the Hirer may take repossession back”.
It is very rare indeed that Tugowners find themselves in a situation where they need to exercise such right. If so, the Hirer is expected under these provisions to arrange repossession locally and if he fails promptly to take responsibility for the safety of the tow going forward, he cannot expect any recourse against the Tugowners. However, with a pandemic raging, locating a suitable, safe place might take a little more care than usual. Whether a port in total lock down is a safe place where repossession may take place will depend on all the circumstances. Hopefully such a situation will be short-lived and that common-sense prevails meantime.
Clause 27 (h)
We refer to our summary above.
Clause 27 contains a variety of useful rights and remedies for the Tugowner in particular seeking to minimise their commercial risks from the coronavirus pandemic that is ravaging the world at the moment. Care must be taken when exercising such rights as, for example, a misstep leading to a wrongful termination under sub-clause (a) (ii) is likely to have serious repercussions.
Where seeking to exercise such rights we would recommend that the Tugowner keeps careful records of all enquiries made and information available at the time which lead to the decision that was made just in case they should later be called to justify the reasonableness of it.
The terms of sub-clause 27 are clearly weighted in the Tugowners’ favour. That said, none of the termination provisions operating in favour of the Tugowner give rise to the right to a Termination Fee under Box 39 and Clause 22 (Termination by the Hirer). Sometimes a Termination Fee is high, and perhaps for good reason and is relied upon by the Tugowner to get his tug home without too much loss just as much as disincentivising the Hirer from terminating too readily. The result is that situations will develop where there is a stand-off.
If you are a Hirer acting yourselves under contract to a principal rather than for your own account, then you would be wise to ensure your head-contract is on back to back terms with Clause 27 in its entirety – you do not want to be caught out in the middle unable to terminate down the line or recover high Delay Payments.
We hope this general summary is helpful. Please contact the writers for any queries you may have.
Simon Tatham, Partner at Tatham & Co
David High, Senior Associate at Tatham & Co