Shipowner’s Limitation of Liability

Shipowner’s Limitation of Liability

Shipping commodities and people by sea is inherently dangerous. Goods are exposed to the risk of loss due to storms, fire, collisions, pirates and other perils of the sea. Besides, seafarers are human being who could make mistakes during voyage and operation of this. These mistakes can cause the loss of a ship, injury or death of people, damage or loss of cargo through negligence. These risks have always been a deterrent for shipowners to invest in shipping. Loss of an investment might be normal and acceptable risk, but threat of shipowner’s personal liability from an investment can be unacceptable. During 14th century, medieval sea codes had adopted provisions to limit the liability of ship owners for maritime losses to the amount of their investment in ships. Shipowners’ liabilities would be discharged upon the sale of the ship to pay for them. Later on, those provisions of sea codes became adopted into the laws of maritime nations. In United States, these provisions did not become part of federal maritime law until Shipowner’s Limitation of Liability Act was passed by Congress. Shipowner’s Limitation of Liability Act aim to protect American shipowners from liability risks to which other maritime nation’s shipowners were not exposed. Shipowner’s Limitation of Liability Act is frequently criticized as being unfair to victims. Also, Shipowner’s Limitation of Liability Act is criticized as it is outdated in an era when most commercial shipowners are corporations that can shield investors from liability through the corporate form. In spite of these criticisms, Shipowner’s Limitation of Liability Act has survived, in part because the principle is firmly entrenched and also because Shipowner’s Limitation of Liability Act and the related procedural rules, provide an important mechanism for resolving maritime claims. These maritime claims often involve multiple parties from around the world.

According to Shipowner’s Limitation of Liability Act, a shipowner can limit his liability from risks involved in the ownership of ships. Maritime law recognizes a shipowner’s right to limit liability under certain circumstances. In the United States, shipowner’s right to limit liability is codified in the Shipowner’s Limitation of Liability Act and the procedure for exercising that right is set out in the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions, in the Federal Rules of Civil Procedure (Rule F).

General limits on the shipowner’s liability under the Limitation Act:

Liability of the ship owner is limited to the value of the ship following the incident giving rise to the claim, plus any unearned freight at that time. If the ship is lost at sea or is otherwise without value, then the shipowner’s actual liability would in most cases be zero.

Shipowner’s liability for personal injury or death under the Limitation Act:

Liability for cases involving injury or death is subject to a statutory minimum liability of at least $420 times the tonnage (self-propelled ship gross tonnage) of ship. If the funds available are not sufficient under the general rule limiting the shipowner’s liability to the value of the ship following the incident giving rise to the claim then the portion of those funds allocated to personal injury or death claims is increased to $420 times the tonnage. These special provisions only apply to seagoing ships and do not apply to yachts, tugs, towboats, towing ships, tank ships (not tankers, harbor or river type), fishing ships, fish tender ships, canal boats, scows, car floats, barges, lighters, or nondescript ships.

Generally, shipowner’s liability insurance does not pay claims if shipowner is able to limit his liability according to Shipowner’s Limitation of Liability Act. Hence, liability insurance underwriters may take advantage of the shipowner’s limitation of liability. General rule of marine insurance policies requires that the shipowner “pay to be paid“. “Pay to be paid” means that the insurance underwriters only have to pay to reimburse the insured shipowner after the ship owner has to pay a successful claimant. If the shipowner is able to avoid liability to a claimant, then there is no claim to be reimbursed by the insurance company. In some cases, law of the state applies and permits direct action against the underwriters, a claimant may be able to avoid this rule, but such cases are rare.

According to Shipowner’s Limitation of Liability Act, a shipowner can limit his liability for any loss, damage, or injury by collision or any other act caused “without the privity or knowledge of shipowner”. “Without the privity or knowledge of shipowner” means that the accident occurred without the fault or involvement of shipowner.

  • Individual Shipowner

When shipowner is an individual, application of that test is relatively straightforward. If shipowner was not operating the ship, did not direct the operations of the ship and provided a seaworthy ship with a reasonably competent crew (or at least an apparently competent crew), then any accident that arises because the crew makes a mistake or is caused by circumstances beyond the reasonable control and knowledge of the owner, will be subject to limitation.

  • Corporate Shipowner

When shipowner is a corporation or similar legal entity, such as a LLC (Limited Liability Company), then it is tricky to determine which corporate persons are mere employees whose acts a court would deem to be “without the privity or knowledge” of shipowner and which corporate persons whose acts and knowledge are deemed to be “with the privity or knowledge” of shipowner.

Generally, the acts and knowledge of officers, directors, and managers will be attributed to the owner of company. The acts and knowledge of persons who simply do the tasks to which they are assigned, are not attributable to the owner of company for purposes of the Shipowner’s Limitation of Liability Act. Limitation of liability to apply, the accident must have occurred solely due to the negligence or wrongful act of a non-managerial employee or agent.

According to Shipowner’s Limitation of Liability Act, shipowner cannot limit his liability if his ship is not seaworthy (unseaworthy). Duty of a ship owner to provide a seaworthy ship is absolute and non-delegable under maritime law. While a corporate shipowner can only exercise that duty through employees, the importance of providing a seaworthy ship is so significant that the owner is held personally liable for any failure to do so.

Obligation of seaworthiness applies to the ship itself. Ship must be staunch and fit for its intended service and it must be in good repair with proper equipment. Furthermore, ship must be crewed with competent and duly licensed officers and must have a competent and suitable crew. For example, if the ship master does not hold the appropriate licenses to operate the ship or ship master has a known drinking problem or if a crew member is known to have dangerous propensities, then a court could find that shipowner failed his duty to provide a seaworthy ship.

Whether the acts of the master of a ship are deemed to be within the privity or knowledge of shipowner depends on:

  • Scope of ship master’s authority
  • Nature of the negligence alleged to have caused the accident

Ship master has unique authority over a ship. Ship master is shipowner’s representative on the ship. Navigating and operating a ship are considered to be operational acts constrained within a web of rules, procedures and standards and are not considered to be managerial acts. Generally, ship master’s navigational errors at sea are not attributable to shipowner. Shipowner relies upon the master’s skill and expertise and operational errors are not within the privity or knowledge of shipowner. On the other hand, some errors of ship master could be attributable to shipowner, if ship master exercise of managerial authority, like steaming with a ship the master knows to be unseaworthy. If a case involves a claim for personal injury or death, privity or knowledge of ship master or shipowner’s superintendent or managing agent, at or before the beginning of the voyage, is imputed to shipowner for purposes of determining whether the owner may limit its liability.

Accident caused, even only in part, by fault on the part of shipowner or company’s leadership or managerial personnel will defeat the right to limitation, such as accidents caused in part by:

  • Acts of a Board of Directors;
  • Directions given by a corporate officer
  • Negligence or poor judgment on the part of a manager
  • Failure to provide for, or exercise, adequate supervision by the company’s office or managers
  • Negligent entrustment of the ship to a person not competent, qualified, or fit to operate the ship
  • Negligent hiring of unqualified or unsuited persons

Shipowner cannot reduce the risk of liability by reducing his involvement in ship management. Many years ago, some shipowners were not involving ship management and might back away from involvement in ship management in order to avoid responsibility and potential liability for marine accidents. Abdication of the shipowner’s responsibility led to international concerns of substandard ships. International Maritime Organization (IMO) developed the International Safety Management (ISM) Code that requires shipowners or their ship managers to implement a Safety Management System both for the managing company and for each ship. According to Safety Management System, ship operations, maintenance and safety matters are analyzed and standardized, non -conformities must be reported up to a senior Designated Person Ashore and the company must follow up on reports to ensure that the situation is corrected.

International Safety Management (ISM) Code requires owner involvement in the management of the ship. If an unfortunate accident happens, one line of inquiry will be why the Safety Management System failed to prevent such risks. Safety Management System itself was checked and if it is adequate. If Safety Management System was adequate on paper, the next question would be whether shipowner had adequately implemented the Safety Management System in the company or on board the ship. Implementation of the Safety Management System is an obligation of the shipowner, a court could find that an accident resulting from a deficient Safety Management System is within the “privity or knowledge” of shipowner.

 

Under Shipowner’s Limitation of Liability Act, some types of losses are subject to limitation. Limitation of liability may be available for traditional maritime claims, recent statutes have carved out other types of claims as being excluded from limitation:

  • Cargo damage
  • Collision damage
  • Personal injury and wrongful death

Losses that are expressly excluded from limitation are:

  • Civil damages for wreck removal because such claims are an absolute responsibility of the shipowner
  • Federal claims for oil pollution damages and expenses because such claims are subject to limitation under OPA 90 (Oil Pollution Act of 1990)
  • Unseaworthiness at inception of voyage which is by definition, an absolute duty of shipowner

Under Shipowner’s Limitation of Liability Act, only maritime claims are subject to limitation. Because a Limitation Proceeding is a unique maritime action, only cases that fall within maritime jurisdiction are subject to limitation of liability under the Act. Indeed, many of the notable cases on maritime jurisdiction are actually limitation of liability cases, in which the determination of maritime jurisdiction also determines whether shipowner may limit its liability or be exposed to full damages under the civil law.

In United States, shipowner’s rights under Shipowner’s Limitation of Liability Act are implemented through a procedure spelled out in Rule F of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions in the Federal Rules of Civil Procedure. Rule F describes a process to which maritime attorneys refer as Limitation Proceeding or Rule F Proceeding. Limitation Proceeding also permits shipowner to seek exoneration which is a judicial finding that shipowner’s ship was not at fault, and therefore neither the ship nor shipowner are liable at all for the accident at issue.

Shipowner’s Limitation of Liability Act is intended to protect shipowners who are exposed to liability arising from the ownership of a ship. Limitation Proceeding can be filed by shipowner or bareboat charterer. On the other hand, ship manager who acts as an agent for shipowner is not exposed to liability from ownership of the ship and therefore does not have the right to start a Limitation Proceeding. In a similar manner, time charterer or voyage charterer cannot start a Limitation Proceeding, because time charterer or voyage charterer are not owners of the ship.

Shipowner’s Limitation of Liability Act is also intended to protect bareboat charterer. Bareboat charterer assumes responsibility for the operation of the ship, employs the crew and is responsible for the ship’s maintenance, upkeep and insurance. Bareboat charterer acts as shipowner pro hac vice (permitted for a specific case or action). Bareboat charterer can file for limitation of liability under the Shipowner’s Limitation of Liability Act. In order to file for limitation of liability, citizenship of the ship owner or bareboat charterer does not matter. Even if a foreign citizen or company as shipowner can seek limitation and file a petition for limitation.

Generally, Limitation Proceeding is just like any other federal law suit. Limitation Proceeding:

  • Limitation Proceeding begins with the filing of a complaint (Limitation Petition)
  • Other parties file answers to the complaint (Limitation Petition)

Case proceeds from there just like any other civil suit. Shipowner’s Limitation Proceeding is subject to the Federal Rules of Civil Procedure, except for a few, specifically identified rules. In other ways, Limitation Proceeding is a counter-intuitive action with a number of unique features. These unique features reflect the heritage of the Limitation Proceeding as a special maritime action intended to facilitate the resolution of maritime claims which may involve multiple parties from around the world.

Limitation Proceeding provides:

  • Means for shipowner to limit his liability
  • Shipowner seek exoneration
  • Expedite the resolution of claims from a maritime accident by requiring that all claims be brought together into a single action

Shipowner must file Petition for Limitation not later than six (6) months after receiving a claim in writing. In United States, shipowner may file a petition for limitation of liability or exoneration in the form of a complaint under the Federal Rules of Civil Procedure. In that case, shipowner is known as the Plaintiff in Limitation. Complaint for Limitation or Exoneration must:

  • Complaint must set out all facts of the incident. Complaint must provide much more detail than the usual federal complaint
  • If shipowner seeks exoneration as well as limitation, shipowner must state the demand for exoneration
  • Shipowner must state voyage on which the accident arose and date and place where the voyage ended
  • Shipowner must set out the amount of all demands pending against the ship including all maritime liens or claims of liens whether arising in tort or contract
  • Shipowner must set out what actions or proceedings are pending based on the claims against the ship
  • Shipowner must state whether the ship was damaged, lost or abandoned. If ship was ship was damaged, lost or abandoned, shipowner must state when and where
  • Shipowner must state value of the ship at the end of the voyage or if wrecked, the value of the wreckage or proceeds, if any, and where the wreckage or proceeds are held, and by whom
  • Shipowner must identify the amount of pending freight recovered or recoverable from the ship
  • Shipowner must state whether the remains of shipowner’s interest in the ship were transferred to a trustee and if so, who and how much
  • Shipowner must state what voyages the ship has made since the voyage on which the accident occurred and any existing liens arising from such later voyages, names and addresses of the lien holders
  • Shipowner must state whether the ship sustained any damages in the later voyages

Limitation Proceeding’s Limitation Fund:

If a shipowner files the complaint for limitation or exoneration, ship owner must also deposit with the court. That deposit is called Limitation Fund. Limitation Fund is for the benefit of the persons with claims arising from accident, an amount equal to the value of shipowner’s interest in the ship and pending freight. Furthermore, shipowner may post a bond or other security acceptable to the court. Alternatively, shipowner may transfer to a trustee who is appointed by the court for all of shipowner’s interest in ship and pending freight. Besides, shipowner may be required to provide funds or security to cover such additional costs as the court may set out to secure the costs of the action or other matters, such as interest on the claims. Shipowner’s Limitation of Liability Act provides for a minimum fund of $420 per ton for seagoing ships for injury or death claims. All of these sums of deposits are referred to as the Limitation Fund.

Resolution of claims from a maritime accident and Limitation Proceeding process:

  • Complaint for Limitation is filed
  • Shipowner posts the Limitation Fund
  • Court issue an injunction requiring that all other claims and proceedings against the shipowner must cease
  • Court will then issue a notice to all claimants requiring them to file claims in the Limitation Proceeding within a fixed period of time, not less than thirty (30) days later
  • Court will direct notice to be sent to known claimants and also require the notice to be published in newspapers once a week for four (4) weeks prior to the due date for claims. This process is called concursus (combination) in other words court requires all claims arising from the maritime incident to be resolved in a single proceeding
  • After receiving notice each claimant must file an answer to the complaint and a claim against shipowner within the response time set by the court or the claimant’s claims will be forever barred
  • When various claimants have joined in the case, court will issue an order specifying the procedure to be followed, how discovery of evidence will be managed, and other coordinating details, depending on the complexity of the case.

Limitation Proceeding is a federal court case and a judgment in a Limitation Proceeding is the same as a judgment in any other federal case. In other words, a judgment is subject to the same precedential value as any other decision. Like, if shipowner is exonerated in a Limitation Proceeding, that is a binding judgment that the ship was not at fault in the accident.

Third-Parties can participate in a Limitation Proceeding. Limitation Proceeding case will be subject to most of the same Federal Rules as other cases, including the rules allowing parties with affected interests to join in the case. Other parties who may be at fault or at least subject to claims arising from the same incident, may also participate in the case. The crucial point is, a party involved in an incident leading to a Limitation Proceeding may be wise to join in the limitation case, because if he does not, any claims it may have against the shipowner would be barred and any decisions rendered by the limitation court could be binding on it.  Any party affected by a marine incident should be aware of the risk of participating or not participating in a limitation action.

Limitation Proceedings are creatures of federal statute. Limitation Proceedings can only be tried in federal courts. In United States, legal venue for a limitation action is set out in Rule F, rather than the customary legal venue provisions of the Federal Rules. Legal venue, in order of preference, is as follows:

  • Where the ship was arrested and/or attached
  • Where shipowner has been sued with regard to the claims
  • Where the ship may be found
  • If none of the above apply, then any district

Once Limitation Proceedings case is filed, court may transfer the case to any other district as justice requires.

Generally, Limitation Proceeding case is a unique maritime proceeding, so there is no right to a jury. Limitation Proceeding cases are tried to a judge alone and parties do not have any right to a jury. Nevertheless, claims that are brought in a limitation action, typically tort claims, are usually subject to the Saving to Suitors clause that allows maritime plaintiffs the right to try cases in common law courts.  Common law courts are the regular federal or state trial courts that may have jurisdiction over the claims. Parties to cases in common law courts typically have the right to a jury trial.

Shipowner’s right to a Limitation Proceeding by judge alone may conflict with a claimant’s right to a trial of his claim to a jury. Courts have developed rules for resolving this potential conflict. Federal court in a limitation case may agree to lift the injunction against other cases arising out of the incident being tried in the limitation action when reasons for the injunction under Shipowner’s Limitation of Liability Act do not exist or when the claimants provide an adequate stipulation to protect the core rights of the shipowner. Cases where the courts have lifted the injunction are those involving:

  • Single claimant and limitation fund that is greater than the claim
  • Single claimant and stipulation that the federal court may decide the limitation issue
  • Multiple claimants who agree that limitation issues will be reserved to the federal court, that no damages will be awarded in excess of the limitation fund, if awarded, and waiving res judicata (already been decided by another court) in any subsequent limitation case

Shipowner’s Limitation of Liability Trial Procedure:

Shipowner is the plaintiff in limitation, so shipowner bears the burden of proving to the court that it is entitled to exoneration or limitation. On the other hand, claimants bear the burden of proving their own claims. Most Limitation Proceedings cases proceed along the following lines:

  • Case may begin with certain stipulations between the parties as to the facts of the incident and the submission of the claims
  • Shipowner presents evidence showing that accident was not the fault of the ship and/or that the actions occurred without the privity or knowledge of the shipowner
  • Claimants present evidence to show that the accident was caused by the fault of the ship or the shipowner or his agent and that shipowner is not entitled to exoneration or limitation
  • Following any rebuttal (a statement, designed to refute or negate specific arguments put forward by opponents) presentations, court renders its findings on liability, deciding who was at fault in causing the accident and whether fault was within the privity or knowledge of the shipowner
  • Parties (shipowner and claimants) may then seek review of the decision of the district court by filing an interlocutory (temporary or provisional) appeal with the Court of Appeals. Maritime cases in general and limitation cases in particular, can be exempted from the general prohibition against interlocutory appeals
  • When liability for the accident has been settled and assuming that shipowner has been found to be at fault, the court moves on to damages phase of the trial by evaluating the proof of damages submitted by the claimants
  • If shipowner was permitted to limit his liability, fund is then divided among the claimants
  • If shipowner was denied limitation then court issue a judgment against shipowner for the claims established by the claimants
  • Later on, parties (shipowner and claimants) have the right to appeal the final judgment, to the extent that issues were not appealed and decided earlier

If shipowner’s is found responsible, but shipowner is granted limitation, Limitation Fund is divided among claimants according to pro rata basis of proven value of the claims competing for the fund. In the case of seagoing ships, once the fund is allocated between the claimants, if the portion available to pay claims for personal injuries and deaths is less than $420 times the tonnage of the ship, then that portion is increased to $420 times the tonnage of the ship. Added amount can only be used for personal injury and death claims.

Circumstances that may lead a court to exonerate shipowner:

  • No fault on the part of the ship or shipowner
  • Inevitable Accident that was not avoidable by the exercise of reasonable care
  • Act of God where the accident was caused by forces beyond the control of the parties, such as force of weather
  • Inscrutable Accident where the court is simply unable to determine who is at fault

Circumstances that may lead a court to deny exoneration but allow limitation to the shipowner. Shipowner Limitation of Liability may be allowed when the court finds that shipowner and shipowner’s officers, directors and managers are not at fault for the accident. Circumstances giving rise to accidents for which the ship is at fault, but shipowner is not:

  • Operational or Navigational negligence by officers or crew of the ship
  • Negligence by the crew or other non-managerial employees
  • Unanticipated Unseaworthiness of the ship arising after the ship departs on the voyage (commence voyage) such as an unexpected latent defect of a piece of equipment

Policy Reasons Behind Shipowner’s Limitation of Liability Act:

Generally, people view the Limitation Act as unfair by cutting off the right of an otherwise deserving claimant to damages for harm caused by a ship. Limitation Act runs contrary to the general principle of Respondeat Superior (Respondeat Superior: an employer is responsible for the actions of employees performed within the course of their employment. Respondeat Superior is also called the Master-Servant Rule). On the other hand, Limitation Act has strong policy reasons in its favor. Easiest way to think of the Limitation Act is as a form of corporate liability. If a corporation, acting through its employees, engages in wrongful or negligent conduct and causes harm, corporation can be sued, but  shareholders of the corporation are not personally liable for the damages. Shareholders can lose is the value of the investment in the corporation, unless the shareholder is personally at fault.

 

In United States, Shipowner’s Limitation of Liability Act was originally adopted to encourage the development of the United States merchant marine, by encouraging American investment in ships, by limiting the investor’s potential liability from the operations of the ship, when not resulting from the ship investor’s own fault, to the investment in the ships. Shipowner’s Limitation of Liability Act was intended for commercial purposes and some of the policy considerations involved include the following:

  • Foster investment in ships which supports the national policy to promote the merchant marine
  • Investors may be uninvolved in the actual operation of ships and may only be involved in providing funds
  • Permit the ship to serve as a form of corporate limit on individual owner personal liability
  • Provide a mechanism for the efficient resolution of claims, to minimize the burden on international commerce

Generally, Shipowner’s Limitation of Liability Act regarding limitation of liability is considered to be procedural, so the courts apply the law of the forum with regard to issues concerning the right to limit liability and the procedure for determining whether shipowner may be allowed exoneration or limitation. In United States, Shipowner’s Limitation of Liability Act applies to all ships sued in United States courts. Courts will still apply the substantive law that they determine applies to the case, based upon an analysis of the factors used to determine the choice of law in all maritime cases. In the same manner, limitation actions brought in foreign forums will apply the procedural law applicable in the jurisdiction.

International Shipowner’s Limitation of Liability Law:

Limitation of liability is a well-established principle under the ancient general maritime law, the procedures used could vary substantially from one country to another. In order to provide some uniformity, IMO (International Maritime Organization) developed the Convention on Limitation of Liability for Maritime Claims (LLMC), 1976 (London Convention). Convention on Limitation of Liability for Maritime Claims (LLMC) was adopted by IMO (International Maritime Organization) on 19 November 1976. Convention on Limitation of Liability for Maritime Claims (LLMC) entered into force on 1 December 1986. Total of sixty-three (63) nations ratified Limitation of Liability for Maritime Claims (LLMC) with the notable exception of the United States. Limitation of Liability for Maritime Claims (LLMC) sets specific limits on the shipowner’s liability regardless of the value of the ship at the time of the incident. Limitation of Liability for Maritime Claims (LLMC) also differs from Shipowner’s Limitation of Liability Act in that it permits shipowner, manager and others to limit their liability, regardless of shipowner’s privity and knowledge, unless the loss resulted from shipowner’s personal act or omission committed with the intent to cause such loss or recklessly and with knowledge that such loss would probably result.

Like Shipowner’s Limitation of Liability Act, Limitation of Liability for Maritime Claims (LLMC) provides for the concursus (conjunction, combination) of claims, under which shipowner establishes a limitation fund in a single proceeding from which claims arising from the incident are to be paid and barring other actions against assets other than the fund.

IMO (International Maritime Organization) subsequently developed the Protocol of 1996 to Amend the Convention on Limitation of Liability for Maritime Claims, 1976 (LLMC PROT 1996). Limitation of Liability for Maritime Claims Protocol of 1996 (LLMC PROT 1996) raised the limits for maritime claims to reflect economic changes since the Limitation of Liability for Maritime Claims (LLMC) first went into force. Limitation of Liability for Maritime Claims (LLMC) limits were raised again in the 2012 amendments to Limitation of Liability for Maritime Claims Protocol of 1996 (LLMC PROT 1996) and the increased limits went into effect on 8 June 2015. Total of fifty (50) nations have acceded to or ratified the Limitation of Liability for Maritime Claims Protocol of 1996 (LLMC PROT 1996).

Under Limitation of Liability for Maritime Claims Protocol of 1996 (LLMC PROT 1996), limits of liability are specified for:

  • Claims for loss of life or personal injury
  • Property claims

Actual amount of the limits of liability under Limitation of Liability for Maritime Claims (LLMC) depend on the gross tonnage of the ship at fault. Limitation of Liability for Maritime Claims (LLMC) expresses limits of liability in terms of units of account. Each unit of account is equivalent in value to the Special Drawing Right (SDR) as defined by the International Monetary Fund (IMF). In other words, ship gross tonnage is figured up in intervals in each case and multiplied by SDR (Special Drawing Right). Value of an SDR (Special Drawing Right) varies as part of the international currency market as regulated by the International Monetary Fund.