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Rule 55 Terms of contract

The Association shall not cover under a P&I entry liabilities, losses, costs or expenses:

a which would not have arisen but for the terms of a contract or indemnity entered into by the Member, or by some other person acting on his behalf, unless the terms have previously been approved by the Association, or cover for such liabilities, losses, costs or expenses has been agreed between the Member and the Association, or the Association decides, in its discretion, that the Member should be reimbursed;

b which result from, or would not have arisen but for the Member, or some other person acting on his behalf having used terms of contract which the Association has prohibited, or omitted to use terms of contract which are specified in Appendix IV or which the Association has otherwise prescribed.

 

Guidance

Rule 55 is a reflection and a recognition of the principle of mutuality that is the foundation of P&I insurance. Cover is made available only for those risks that are regularly and routinely encountered by the majority of the membership. Consequently, the risks that are routinely encountered by the majority of the members by virtue of contractual terms that are commonly and regularly used in the industry should be, and are, shared between the membership as a whole. However, if a Member incurs a liability that arises solely as a result of contractual terms that are not regularly and routinely used by the majority of the membership, such risks should not be, and are not, shared by the membership as a whole. 

(A) The Association shall not cover under a P&I entry… (Rule 55)
Rule 55 gives practical effect to this basic principle by providing that cover is not available for liabilities, losses, costs and expenses that arise, not as a result of the use of standardised contractual terms, i.e. terms that are broadly accepted in the industry as the norm, but as a result of terms that are more onerous for the Member. The Rule emphasises that, whilst the Member has the right to agree to such terms should he find it necessary and/or commercially advantageous to do so, he should not expect the wider membership to use its funds to bear the cost of any liability etc., that would not have been incurred had such terms not been agreed. 

(B) …liabilities…which would not have arisen but for the terms of a contract or indemnity… (Rule 55.a)
Rule 55 is designed to protect the membership against any onerous liability that is often imposed on a particular Member under, and as a result of, the terms of a ‘contract or indemnity.’ This phrase is construed widely and includes any form of agreement between the Member and a third party that imposes liability on the Member. It includes, inter alia, contracts of carriage, charterparties, letters of indemnity, towage contracts, salvage agreements and contracts with, and indemnities that are given to, port and harbour authorities, stevedores, crane operators, harbour pilots and Crew members. 

Cover is restricted only for liabilities etc., that arise under contractual terms that are more onerous than the norm and which the Member could reasonably avoid. Therefore, Rule 55 does not exclude cover for liabilities that arise as a result of contractual terms that are unavoidable, or that arise as a result of the unavoidable provisions of law, e.g. liability in tort for negligence or under statute or any other non-contractual source. 

(C) …entered into by the Member, or by some other person acting on his behalf… (Rule 55.a)
In many cases, the relevant ‘contract or indemnity’ will have been concluded by someone acting on behalf of the Member, i.e. as his agent. This could be the master or some other member of the Crew, or the Ship’s manager, crewing agent, broker, Ship’s agent or the Member’s superintendent. In some instances, such a person may be a Co-assured or Affiliate who is considered to be a Member for the purposes of the Rules.1 However, this will not always be the case, and Rule 55 makes it clear that cover may be excluded whether the contract or indemnity is entered into personally by the Member, or by someone else on his behalf, no matter who that person may be. 

(D) …unless the terms have previously been approved by the Association… (Rule 55.a)
If a Member looks to the Association for cover in respect of liability etc., that arises solely as a result of the terms of a contract or indemnity that has been entered into, or given by, the Member, the Association will normally need to consider and approve the terms of the relevant contract or indemnity before it can confirm that cover is available. 

The Member has a duty both prior to, and after, the conclusion of the contract of insurance, to make full disclosure to the Association of all circumstances that the Association would consider to be relevant when deciding whether, and on what conditions, to accept the entry.2 The Member also has a duty to disclose circumstances that arise after the conclusion of the contract of insurance that result in an alteration of risk.3 Such duties include the duty to disclose the terms of any contract or indemnity that may expose the Member to additional liability etc. Therefore, a prudent Member should actively seek to disclose such contractual terms to the Association in order to enable the Association to take such terms into account when considering the overall risk. In case of doubt, the Member is strongly advised to consult the Association before agreeing the terms of any contract or indemnity. 

The Association will not normally consider and approve the terms of known contracts or indemnities on standard terms that reflect a degree of liability that is generally accepted in the industry. For example, the Association and the other P&I clubs that are parties to the International Group have given their approval in advance to contracts on standard terms that are concluded for the purpose of entering or leaving port, or for manoeuvring within the port, certain towage contracts4 and to contracts of carriage that are subject to the Hague or the Hague-Visby Rules.5 However, cover is available for liabilities, loss, costs or expenses incurred by a Member under a contract of carriage that is subject to the Hamburg Rules (and, probably, the Rotterdam Rules if and when they enter into force), only when such Rules are compulsorily applicable by operation of law. 

In the case of non-standard contracts and indemnities, cover will not be available unless they meet certain minimum requirements. For example, all contracts and indemnities are expected to include law and jurisdiction clauses that will enable the Member to defend his interests, and those of the Association when relevant, under systems of law, and before tribunals, that are recognised to be professional and experienced. Furthermore, such contracts and indemnities should not include provisions that waive the Member’s right to limit his liability or that transfer to the Member liability for the negligence of another party. 

(E) …or the Association decides, in its discretion, that the Member should be reimbursed. (Rule 55.a)
The Association has a wide discretion6 whether or not to reimburse Members for liabilities etc., that arise under the terms of contracts and indemnities. Such discretion is exercised in a manner that is intended to safeguard the principle of mutuality that is described above. The Association will also be guidedin this regard by the guidelines and recommended practices that are agreed from time to time between the parties to the Pooling Agreement. 

(F) …liabilities…which result from, or which would not have arisen but for…having used terms of contract which the Association has prohibited… (Rule 55.b)
The Association regularly issues Circulars that are designed to make Members aware of clauses in contracts and/or indemnities that are considered to be onerous for Members, together with comments that are intended to clarify the availability of cover. In some instances, the Association will make it clear that it does not approve certain onerous terms of contract and that cover will not, therefore, be available for liabilities that arise as a result of the use of such terms. For example, cover is not available for liabilities that a Member incurs by virtue of having voluntarily agreed to adopt the Hamburg Rules or the Rotterdam Rules into his contract of carriage when such Rules do not apply compulsorily. However, cover is unavailable only to the extent that the Member’s liability has been increased by the use of terms or clauses that are not approved by the Association. 

In circumstances where the Association has found it necessary to prohibit the use of certain contractual terms, and has communicated this decision to the membership, it is not entitled thereafter to exercise the discretion that it otherwise has under Rule 55 to reimburse a Member that has incurred liability as a result of having agreed to the use of such terms.7 

(G) …or omitted to use the terms of contract which are specified in Appendix VII or which the Association has otherwise prescribed. (Rule 55.b)
Cover is not available for liabilities, losses, costs or expenses that would not have arisen but for the failure of the Member to include in his contracts the contractual terms that are specified in Appendix VII. The individual clauses that are specified in Appendix VII may change from time to time but the Association and all other P&I clubs that are parties to the International Group have recommended for many years that the ‘New Jason Clause’ and the ‘Both to Blame Collision Clause’ should be included in contracts of carriage of goods. 

The ‘New Jason Clause’ is intended to protect the carrier in circumstances where, pursuant to US law, a carrier is not able to recover general average contributions from cargo when the incident that gave rise to the claim has been caused by the carrier’s negligence, notwithstanding the fact that the incident is one for which the carrier has a defence under the contract of carriage. The ‘New Jason Clause’ has the effect of reinstating the right to recover general average contribution from cargo in such circumstances. 

The ‘Both to Blame Collision Clause’ is intended to protect the rights of a carrier following a collision between the Ship and another ship in circumstances where, pursuant to rights given under US law, the owners of the cargo that is carried on the Ship seek to claim the loss or damage that has been suffered by that cargo from the owners of the non-carrying ship in tort. Under the US ‘innocent cargo’ rule, those cargo interests are entitled to recover 100 per cent of their loss or damage from the non-carrying ship and not merely that proportion of the loss that can be attributed to the proportionate liability of the non-carrying ship for the collision. The non-carrying ship is then entitled to include in its claim against the carrying Ship the amount that it has paid to the cargo that was lost or damaged on the carrying Ship and to recover such proportion of that amount that the carrying Ship bears for the collision. In such circumstances, the ‘Both to Blame Collision Clause’ gives the carrying Ship the right to recover an indemnity from the owners of the cargo for the amount that has been paid by the carrier to the non-carrying ship.

 


1 See the the commentary on the meaning of ‘Member’ in the Guidance to Rule 1.
2 See the Guidance to Rule 6.
3 See the Guidance to Rule 7.
4 See (K)-(O) of the Guidance to Rule 43 (Towage).
5 See (L) of the Guidance to Rule 34 (Cargo Liability).
6 The discretion can be exercised by the administrative officers of the Association.
7 Such discretion can only be exercised by the Association’s Board of Directors pursuant to the authority granted by virtue of Article 6.5.b of the Bye-Laws of Gard P. & I. (Bermuda) Ltd. and Article 9.3.b of the Statutes of Assuranceforeningen Gard -gjensidig-.
8 The owners of the cargo will wish to do so in order to avoid the negligent navigation defence which would be available to the owner of the carrying vessel under the Hague or Hague-Visby Rules had the claim been made against such carrier under the contract of carriage for the cargo.