Case No: 2000 Folio 1106.
BAILII Citation Number: [2001] EWHC 531 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2L L

Date: 7 June 2001

Before:

THE HON MR JUSTICE MORISON
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Between

SMIT INTERNATIONAL (DEUTSCHLAND)	Claimants
GmbH.
v

JOSEF MOBIUS, BAU‑GESELLSCHAFT (GmbH
& CO)		Defendants
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Mr Jonathan Chambers (instructed by Messrs Holman, Fenwick and Willan for the
Claimants)
Mr Thomas Macey‑Dare (instructed by Messrs Middleton Potts for the Defendants)
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JUDGMENT

With reference to R.S.C. Order 68 Rule 1 and the Practice direction of the Master
of The Rolls
dated 9th July 1990 ((1990] 1 W.L.R. 1126)

The Hon. Mr Justice Morison:

1. This is an application by Defendants to set aside a default judgment entered against 	them by Moore‑Bick J dated 20 December 2000. The Court gave judgment pursuant 	to CPR Part 12.10, by reason of the Defendant's failure to acknowledge service within time.

2.	There are two grounds upon which this application is made. First that the 	proceedings were never properly served upon the Defendants in Germany. If this 	ground succeeds then the Defendants are entitled, as of right, to have the judgment set 	aside. If the proceedings were properly served, then the second ground is that the Court should set the judgment aside as a matter of discretion. For this second ground to succeed, the Defendants must, amongst other things, show that they have a real 	prospect of successfully defending the claim brought against them.

3.  The claim arises out of a towage contract made between the parties. By that contract, 	the Claimants, the Tug Owners, agreed to hire their tug, Janus, to the Defendants for a 	6 month charter in the Kiel Canal, Germany. That contract was concluded on the 	BIMCO TOWHIRE conditions. The Claimants say that there is hire due but unpaid in an amount of DM 21,065.75 and that claim forms the first head of relief.

4. 	The other parts of the prayer for relief arise from an accident which occurred on 17 	March 2000 whilst the Tug was towing one of the Defendant's barges. The tow came 	into contact with another vessel, a  dredger, owned by a third party. The third party 	claim was made against the tug and was compromised by the Claimants in the sum of 	DM 75,279. They say that, pursuant to the TOWHIRE conditions, they are entitled to be indemnified by the Defendants in respect of all and any liability arising from the 	accident to the Third Party for direct or consequential loss, and in respect of all the 	Claimants' costs and expenses incurred by them in defending the Third Party's 	proceedings. Following the accident, the Defendants submitted a claim for DM 193,960.49 for the direct and consequential damage they say they suffered as a result 	of the damage to their Tow, and their loss of its use whilst repaired. The Claimants 	say that by reason of the wording of the TOWHIRE conditions there is no liability 	upon them in this respect and they sought a declaration to that effect.

5.  The Judgment granted the relief which the Claimants were seeking, namely a money judgment and two declarations.

6.  The relevant terms of the TOWHIRE contract are

"12. Tow‑worthiness of the Tow

(a) The Hirer shall exercise due diligence to ensure that the Tow shall, at the commencement of the towage, be in all respects fit to be towed from the place of departure to the place of destination.

13. Seaworthiness of the Tug

The Tugowner will exercise due diligence to tender the Tug at the place of departure in a seaworthy condition and in all respects ready to perform the towage, bu the Tugowner gives no other warranties, express or implied.

18. Liabilities.

1….

2(a) The following shall be for the sole account of the Tugowner without any recourse to the Hirer, his servants or agents, whether or not the same is due to breach of contract, negligence or any other fault on the part of the Hirer, his servants or agents:

(i) Loss or damage of whatsoever nature, howsoever caused to or sustained by the Tug or any property on board the Tug.

(ii) Loss or damage of whatsoever nature caused to or suffered by third parties or their property by reason of contact with the Tug or obstruction created by the presence of the Tug. 

(iii) Loss or damage of whatsoever nature suffered by the Tugowner or by third parties in consequence of the loss or damage referred to in (i) and (ii) above.

The Tugowner will indemnify the Hirer 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 loss or damage. The Tugowner shall not in any circumstances be liable for any loss or damage suffered by the Hirer or caused to or sustained by the Tow in consequence of loss or damage, howsoever caused to or sustained by the Tug or any property on board the Tug.

2(b) 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 breach of contract, negligence or any fault on the part of the Tugowner, his servants or agents:

(i)Loss or damage of whatsoever nature, howsoever caused to or sustained by the Tow.

(ii)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.

(iii)Loss or damage of whatsoever nature suffered by the Hirer or by third parties in consequence of the loss or damage referred to in (i) and (ii) 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 loss or damage but the Hirer shall not in any circumstances be liable for any loss or damage suffered by the Tugowner or caused to or sustained by the Tug in consequence of loss or damage, howsoever caused to or sustained by the Tow.

3 Save for the provisions of Clauses 11, 12, 13 and 16 neither the Tugowner nor the Hirer shall be liable to the other party for loss of profit, loss of use, loss of production or any other indirect or consequential damage for any reason whatsoever.

4 Notwithstanding any provisions of this Agreement to the contrary, the Tugowner shall have the benefit of all limitations of, and exemptions from; liability accorded to Owners or Chartered Owners of Vessels by any applicable statute or rule of law for the time being in force and the same benefits are to apply regardless of the form of signatures given to this Agreement."

7.	Clause 11 imposes upon the Hirer responsibility for obtaining permits and certification to enable the tow to be undertaken, and requires the Hirer to reimburse the Tug for any loss and expense caused by his failure to perform this obligation, and to continue to pay hire during any period of delay caused thereby. Clause 16 deals with the general right of the Hirer to cancel the agreement and with his specific right to cancel in the event of the Tug not being ready to perform the tow at the agreed time, in which event the Tug is liable in damages for detention if due to the wilful default of the Tugowner.

8.	I turn, first, to the question of service. The evidence shows the following sequence of events. The Claim Form was issued on 6 October 2000. On 23 October a request was lodged in the Foreign Process Section of the High Court for the Claim Form to be served through the Court on the Defendant in Germany, in accordance with the Civil Jurisdiction and Judgments Act 1982. The Court Service informed the Claimants' solicitors on 21 November 2000 that evidence of service had been received by them from the German Authorities. The certificate of service shows that the Claim Form was served on the Defendants on 10 November 2000 at their premises in Hamburg. The name of the person upon whom service at their address was effected was Gabriele Konig. The certificate is signed and stamped. There is evidence that the Claim was translated into the German language.

9.		The Defendants say that Ms Konig does not recall receiving any official documents in a foreign language; that had such been received she would have passed them to Mr Mobius, who does not recollect seeing them, and a search of the Defendants' premises have not revealed them. The defendants also say that although there is a chain between the Claimants' solicitors, the Senior Master's room and the Hamburg
Amsgericht and thence to the Defendants, the links in the chain are not secure. The outdoor clerk's recollection as to what he delivered to the Master's Office is unconvincing, since he deals with hundreds of cases; further, there is no checklist or written note confirming that all the correct documents were lodged and the request for service contains no details of the documents lodged except as to the "nature" of the
process to be served. The request by the Master's Office to the Hamburg authority does not specify which documents had been lodged. The certificate of service from the Hamburg Amsgericht simply confirm that the documents in the request had been delivered and this was probably a pro forma statement which has little weight and there is no record showing what Ms Konig actually received. In any event, there was
administrative incompetence by the Amsgericht.

10.	I regard the challenge to service as hopeless. There is a clear chain from the solicitors' offices to the defendants in Germany. The solicitors confirm that the Claim Form, Response pack with German translations were lodged with the Foreign Process Office and the Foreign Process Office subsequently confirmed that evidence of service of the Claim Form had been received. The evidence was in the form of a
Certificate dated 14 November which certifies that service had been effected under Article 6 of the Hague Convention by way of personal delivery to Ms Konig. It is common ground that Ms Konig was an employee at the material time and signed for receipt of a package of documents delivered by the Amsgericht. The certificate certifies that the documents referred to in the request had been delivered. This evidence is quite sufficient to prove service and if the defendants wished to challenge the certificate of due service they are required to do more than merely assert that the chain links are weak. In my view the point about service should never have been argued; it is hopeless.

11.		However, the question whether, if there has been proper and lawful service the defendants have shown an arguable defence is of more interest and raises two hitherto undecided questions in relation to what is a common form of contract of Tow‑hire.

12.		The defendants say that the Tug was unseaworthy as the Master was constantly drunk and unfit to be in charge of a vessel. Were that allegation, which is denied, to be true, then for the purpose of this application only it is accepted that such would arguably render the tug unseaworthy in breach of Clause 13. This argument would not affect the Tug's entitlement to the payment of outstanding hire but it would, say
the defendants, give them a defence to the claim for declaratory relief.

13.		Put in simple terms, the Defendants say that where the Tugowner is in breach of Clause 13, he cannot rely upon clause 18(2)(b) because the knock‑for‑knock agreement in Clause 18 is posited upon the assumption that the Tug was in a seaworthy condition and the Tow was Tow‑worthy [see clause 12]. In support of this submission, the defendants say that an analogy may be drawn with the way the protections given by the Hague/Hague‑Visby Rules operate. A carrier whose vessel is unseaworthy cannot, under the Rules, rely upon the excepted perils to avoid liability to the cargo interests in respect of damage to cargo.

14.		For their part, the Claimants say that the Hague/Hague-Visby Rules provide no analogue. The Rules are concerned with how the cargo came to be damaged; clause 18 is not concerned with causes but is simply concerned to identify whether the collision was between the Tug and another vessel or the Tow and another vessel.  Under Clause 18(2)(b) of the knock‑for‑knock arrangement, regardless of fault or blame, if the Tow collided with the third party vessel then the Hirer must pay for the damage to the other vessel and bear the cost of repair to the tow. The converse would be true under clause 18(2)(a) if the Tug were in collision and not the Tow.

15.      The second argument, raised at the last minute, relates to limitation of liability under the Merchant Shipping Act 1995 [the Act]. This is a statutory right to limit liability by reference to a fixed sum calculated by reference to the tonnage of the vessel involved. As Lord Denning said in The Bramley Moore [1964] P page 200, at page 220:

"...limitation of liability is not a matter of justice. It is a rule of public policy which has its origin in history and its justification in convenience."

16.		The present limitation provisions are governed by the Act and by the 1976 Limitation Convention, which, by virtue of section 185, is incorporated into law in the United Kingdom. Article 1 of the Convention gives to "shipowners" and salvors the opportunity to limit their liability, and Article 1.2 defines "shipowner" to mean the owner or charterer of a ship. Article 2 paragraph 1 defines the claims which are subject to the limitation as

"(a) claims in respect of... damage to property ... occurring ... in direct connection with the operation of the ship ... and consequential loss resulting therefrom

Paragraph 2 of that Article provides that:

"Claims set out in paragraph 1 shall be subject to limitation of liability even if brought 	by way of recourse or for indemnity under a contract or otherwise"

Schedule 7 to the Act enacts provisions in connection with the Convention and by paragraph 2 it is provided that the right to limit under the Convention

"shall apply in relation to any ship whether seagoing or not, and the definition of "Shipowner" in paragraph 2 of Article 1 shall be construed accordingly."

Paragraph 12 of Schedule 7 defines the word "ship" as including references to

"any structure (whether completed or in course of completion) launched and intended for use in navigation as a ship or part of a ship."

17.		The claim made by the Tugowners under the contractual indemnity clause in Clause 18(2)(b) of the TOWHIRE contract is, so the defendants submit, a claim within Article 2.1 of the Convention which is in connection with damage to property [the dredger] arising out of the operation of the Tug [a ship]. Thus, they are entitled to limit the amount claimed from them to the limit calculated by reference to the tonnage of the Tug. The Claimants say that the claim under the indemnity clause is not a claim in connection with damage arising out of the operation of the Tug, but rather out of the damage caused to the dredger by the tow. But the defendants say that if this argument were right, the owners claim against them is in connection with the operation of the Tow, which is also a ship. The Claimants then say that by reason of clauses 18(2)(b) and 18(4) of the contract, the right of the Hirer to limit his liability to the Tugowner under the Act and the Convention has been excluded by agreement, as is permitted.

18.		Neither argument is obviously right or wrong; each has much to commend it.  Ultimately, my decision is based upon what I perceive to be the more business‑like, or commercial, approach.

19.		The knock for knock agreement is a crude but workable allocation of risk and responsibility: even where the tug or tow is wholly responsible for the accident liability depends entirely upon the happenstance of which of the two collided with the third party. Where damage is caused to an innocent third party during a tow it may often be difficult to ascertain whether the tug or tow or both were at fault. So far as the innocent third party is concerned, provided he receives full satisfaction, the identity of the tortfeasor is unimportant. But if there were disputes between tug and tow, with each blaming the other, absent the agreement there would be a risk that the third party would have to institute proceedings and await judgment before receiving
compensation. Thus, an innocent third party himself receives benefit from this type of knock for knock agreement. Further, either the tug or the tow can deal with and settle the third party claim, as the indemnity provision will apply to ensure that as between tug and tow, the risk is borne by the appropriate party under either 18(2)(a) or 18(2)(b). The tug may deal with and settle a third party claim where the tow must bear responsibility and, vice versa. But the settlement must be reasonable.

20.		Introducing arguments about seaworthiness into this blunt and crude regime would lessen the effectiveness of the knock for knock agreement. This court is familiar 	with disputes as to seaworthiness and is aware that they often raise technical issues, 	sometimes of complexity. I am inclined to the view that the intention behind the 	standard form contract was not to permit seaworthiness arguments to intrude into the allocation of risk. Clause 18.3 does not suggest otherwise. One can well imagine a case where, due to unseaworthiness, the tug was not ready when it should have been and the tow owners suffer consequential losses which the tug would have to meet. To a limited extent, this conclusion is in accordance with the express wording of subclauses 2(a) and 2(b) where the draftsman has apportioned responsibility "whether or not the same is due to breach of contract". This suggests that the apportionment regime was not posited upon the assumption that there was no breach of clause 12 or 13 as the case might be, but rather was regardless of whether those clauses were broken. On the first argument, therefore, both from the structure of the agreement and its wording I am of the view that even if the tug were unseaworthy the tow must bear responsibility for the third party damage and must bear its own losses arising out of damage to the tow [clause 18(2)(b)(i) and (iii)].

21.	That leaves the limitation defence, which was not as fully argued as counsel might 	perhaps have wished.

22.	The position in law in relation to limitation in connection with damage to third parties 	where vessels are under tow is set out in Rainey's "The Law of Tug and Tow". I 	regard the author's exposition of the relevant law as correct, supported as it is by 	sound analysis of the case law. For present purposes, the position may be summarised as follows. Assume a collision to which the Convention applies, 	between an innocent vessel and vessels under tow, where, as here, the tug and tow are 	not in common ownership:

If the tow were alone to blame, the, claim would [subject to defences which 	are presently irrelevant] be limited by reference to the tonnage of the tow; and, 	conversely, were the tug alone responsible, the limitation would be calculated 	by reference to the tonnage of the tug. Where both tug and tow were at fault 	each would be able to limit liability by reference to the tonnage of his tug or 	tow, as the case might be.

23.	In this case the Hirer says that the loss was caused entirely by reason of the way the 	tug was operated; yet under the knock for knock agreement responsibility is placed 	entirely on the Tow, as a matter of contract. The claim under article 2 is a claim in 	respect of damage to property occurring in direct connection with the operation of "the ship", namely the tug.

24.	It seems to me that the relevant claim under clause 18(2)(b) is a claim arising out of 	the operation of the tug and not the tow. "The ship" does not change. In any event, I doubt whether the Hirer's barge is a ship within the extended meaning of "ship". The claim under clause 18 by the tug is not by reason of a direct connection with the operation of the tow, but rather by reason of the knock for knock agreement and the limitation provision is not incorporated into Clause 18(2)(b). The Tow is protected to the extent that the third party's claim may be limited to the tug's tonnage and the Hirer is only liable for the amount of a claim which has been reasonably settled. Thus, if the tug unreasonably refused to limit the claim by reference to the tug's tonnage, that could provide a defence. I do not think this is the way the case is put by the Hirer; rather he seeks to limit his liability as a result of the claim for an indemnity, rather than challenging the reasonableness of the settlement with the third party which the tugowner seeks to recover. But I will hear further argument on this question.

25.	Where the third party claim arose out of a collision with the tow but was made by 	reference to alleged negligence of tug and tow [assuming the tow was a ship] then the 	settlement might reflect both limits and the claim for an indemnity would reflect this. 

26.	I do not consider as correct the argument on behalf of the Tugowner that clause 18.4 	represents an exclusion of the limitation legislation so far as the tow is concerned on 	the grounds expressio unius exclusio alterius. Express words would be required. In 	my view clause 18.4 is emphasising that where the third party damage can be limited 	by reference to the tonnage of the tug then it should be, whichever of the two parties is actually handling the third party claim.

27.	In my view, therefore, the limitation point as I understand it is empty [subject to 	paragraph 24 hereof] and the application to set aside the default judgment should be dismissed.