Shipowner’s Limitation of Liability
The concept of limiting liability can be traced back to a shipowner’s reluctance to engage in the perilous realm of foreign trade without prior knowledge of their overall financial risk exposure and the regulations that would govern their venture. The practical remedy for this conundrum was to restrict the compensation awarded to aggrieved parties to the value of the ship itself and to confine all legal proceedings resulting from a particular incident to a single jurisdiction. This measure not only facilitated trade but also simplified the legal complications arising from the presence of foreign maritime claimants. In order to formalize these objectives, various international conventions such as the London Convention of 1976 have been established.
The original restriction on damages was the ship itself. A shipowner could simply abandon the ship to the prospective judgment creditors, and the claimants would then divide the value of the ship pro rata. This procedure is not dissimilar to bankruptcy. The value of the pending freight was included in the assets that were available to pay claims.
In contemporary versions of limitation, the shipowner is generally held liable, in effect, for twice the value of the ship, as they could lose the ship and an equal amount in third-party liability. The most recent Conventions utilize a pecuniary value per ton of displacement, sometimes with a lower and upper limit. However, the right to limitation has been subject to certain restrictions. For instance, if the shipowner was in collusion with the wrongdoer or was aware of the condition that caused the harm when they could have rectified it, the right to limit liability may vanish. Moreover, if an intentional injury can be directly attributed to the shipowner, it acts as a bar to the right to limit.
The inclusion of limitation laws into a state’s legal system serves two primary interests:
1- A comprehensive and equitable consensus that acknowledges the exigencies of all stakeholders in the aftermath of an occurrence causing loss or harm.
2- The narrow self-concern of the shipping world.
The requirements of the shipping sector are threefold:
1- Predictability: The crux of the statutory obligations for the concerned enterprise is whether the consequences of liability litigations can be anticipated with a satisfactory degree of certainty, permitting the calculation of an actuarially determined premium. Even if self-funding is a feasible alternative, a degree of uniformity in verdicts is imperative.
2- Uniformity: Prior to embarking on her voyage, the ship must be cognizant of the statutes by which she will be bound. Owners of ships and other stakeholders engaged in maritime commerce, in conjunction with governing bodies, also possess a profound stake in homogeneity. Ideally, a singular legal framework should govern all ports, cargoes, and ships.
3- Fairness: The outcomes of the limitations and provisions for recuperation should align with the principles of equity. A level of restitution that is reasonable for carriers and just for the aggrieved party must be ascertained.
Shipowner’s Limitation of Liability in the United Kingdom
Limiting the liability to the value of the ship was a revolutionary concept in English jurisprudence, initially enforced in a restricted manner by statute as early as 1733 and eventually gaining wider acceptance in the domain of maritime law during the 19th century. However, a monumental transformation was introduced towards the end of the 19th century with the inception of the first comprehensive Merchant Shipping Statute, the Merchant Shipping Act 1894. This pioneering legislation, which comprises eight parts and over 700 sections, marked a significant milestone in British maritime law. The Merchant Shipping Act 1894 (Section 503) is devoted to the shipowner’s limitation of liability.
The system of limitation underwent a radical transformation from its previous method, which relied on the value of the ship, to one based on the ship’s tonnage. This change was motivated by the belief that the tonnage method was more stable and dependable, as a ship’s tonnage remains constant throughout its lifespan unless it undergoes reconstruction. In contrast, the value of a ship invariably declines over time as the ship ages. The term “tonnage” was precisely defined in Section 503 of the Merchant Shipping Act of 1894″
“The gross tonnage without deduction on account of the engine room provided that there shall not be included in such tonnage any space occupied by seamen or apprentices and appropriated to their use…”
In contemporary jargon, we freely refer to a ship’s limitation tonnage. This is what is meant by the Merchant Shipping Act of 1894 (Section 503).
Prior to December 1986, the law governing the restriction of shipowners and other parties in the United Kingdom relied on the 1957 International Convention. This was enshrined in both the original Merchant Shipping Act of 1894 (Section 503) and the 1958 Amendment to the 1894 Act, otherwise known as the Merchant Shipping (Liability of Shipowners and Others) Act 1958. The purpose of the 1958 Act was to amend Section 503 of the 1894 Act and incorporate the regulations of the 1957 Convention into English law. However, the International Convention Relating to the Limitation of the Liability of Owners of Sea-Going Ships (1957 Convention) has since been replaced by the 1976 (London) Convention on Limitation of Liability.
1976 (London) Convention on Limitation of Liability
The 1976 (London) Convention on Limitation of Liability has been incorporated into United Kingdom law by the Merchant Shipping Act 1979 (Sections 17-18). The 1976 (London) Convention on Limitation of Liability introduced some radical changes to the International Convention Relating to the Limitation of the Liability of Owners of Sea-Going Ships (1957 Convention). Merchant Shipping Act 1979 (Sections 17) was repealed by the Merchant Shipping Act 1995 which came into force on 1st January 1996. The 1976 (London) Convention on Limitation of Liability now has the force of law in the United Kingdom under Section 185 and Schedule 7 of the Merchant Shipping Act 1995.
The 1976 (London) Convention on Limitation of Liability and the Merchant Shipping Act 1995 have both widened the scope of who may limit. The 1976 (London) Convention on Limitation of Liability extended the provisions of Section 503 to include salvors and insurers. Therefore, the harshness in The Toju Maru would not occur under the 1976 (London) Convention on Limitation of Liability.
The Toju Maru (1971) Case
In the case of Toju Maru (1971), a salvage company was hired to provide salvage services to Tojo Maru. During the course of the services, a diver employed by the salvage company fired a bolt through the shell plating into a tank that had not been gas-freed, causing an explosion and resulting in additional damage worth £330K to the Tojo Maru. As a result, the owners of the Tojo Maru filed a claim against the salvors for negligence and sought damages, while the salvors filed a claim for salvage reward against the owners of the Tojo Maru. The salvors attempted to limit their liability in accordance with the provisions of the Merchant Shipping (Liability of Shipowners and Others) Act 1958. The court held that the diver’s negligent act was not within the scope of a person managing the ship. Therefore, the salvors were unable to limit their liability.
Right to Limit Liability
Originally, when the Merchant Shipping Act 1894 was passed it was only shipowners who were entitled to limit liability. The Merchant Shipping (Liability of Shipowners and Others) Act 1958 enlarged the categories of those entitled to limit to “anyone with an interest in a ship”, therefore widening it to Charterers, Ship Managers, Ship Operators, and even the Ship Master.
1976 (London) Convention on Limitation of Liability casts an even broader scope:
1- Salvors: Under the Merchant Shipping (Liability of Shipowners and Others) Act 1958, salvors faced significant difficulties as their operations were often specialized and required their personnel to be either in or under the water, or aboard the stricken ship. Their negligent actions or defaults rarely met the old pre-conditions for limiting liability, which mandated that they occur during the navigation or management of the ship. Consequently, salvors, except in exceptional circumstances, were ineligible for limitation rights. However, the 1976 (London) Convention on Limitation of Liability (Article 1, Section 1) now allows salvors to limit their liability in their own right, and not merely in their capacity as shipowners, as was previously the case. This is further emphasized by the language in Article 2 (1) (c):
“Claims in connection with… salvage operations can be subject to the limitation of liability”
2- Insurers: Insurers are entitled to limits and this is also contained in the 1976 (London) Convention on Limitation of Liability (Article 1, Section 6). The 1976 (London) Convention on Limitation of Liability (Article 1, Section 6) stipulates that:
‘”An insurer of liability for claims subject to the limitation in accordance with the rules of this Convention, shall be entitled to the benefits of the Convention to the same extent as the assured himself”
Types of Claims and Limitations of Liability
The 1976 (London) Convention on Limitation of Liability, specifically Article 2, outlines the categories of claims that are eligible for limitation. Previously, the prerequisite for such claims was restricted to “acts, neglects or defaults in the navigation or management of the ship.” However, the 1976 (London) Convention on Limitation of Liability now permits claims for “loss or damage occurring on board or in direct connection with the operation of the ship.” In addition, the Convention also encompasses claims for wreck removal, as stipulated under Article 2 (d), as well as the destruction or rendering harmless of the cargo, in accordance with Article 2 (e).
The 1976 (London) Convention on Limitation of Liability (Article 3) sets out the claims which are excluded from limitations:-
a- Claims for Salvage Award or General Average (GA) contribution
b- Claims by Servants of the Shipowner or Salvor whose duties are connected with the ship or salvage operations
c- Oil pollution claims
d- Nuclear damage
The Breydon Merchant (1992) Case
The Breydon Merchant (1992) case serves as an illustration of Article 3 of the 1976 (London) Convention on Limitation of Liability. In this instance, the MV Breydon Merchant experienced a severe engine room fire and required the assistance of salvors. Consequently, the shipowners sought to limit their liability in accordance with the 1976 (London) Convention on Limitation of Liability. However, the cargo owners contested this, citing the unseaworthiness of the MV Breydon Merchant and claiming that their request for damages, which included a contribution towards salvage costs, was not subject to limitation due to the exclusion of salvage claims under Article 3.
It was determined that the cargo owners’ claim was not classified as salvage, but instead, as damages resulting from a breach of contract. One factor to consider in assessing the damages would be the cargo’s contribution to the salvage effort. According to The 1976 (London) Convention on Limitation of Liability (Article 2), shipowners have the ability to limit their liability for a variety of claims, including instances where there is loss or damage to property onboard, as well as consequential losses, “whatever the basis of liability may be.” This means that shipowners can limit their liability for the claim made by cargo owners, even if the liability stems from a breach of contract, tort, or statute.
1976 Convention and Limitations of Liability
This is dealt with by The 1976 (London) Convention on Limitation of Liability (Article 4). It is one of the most important provisions and certainly the most litigated. The 1976 (London) Convention on Limitation of Liability (Article 4) brings in a radical change from the International Convention Relating to the Limitation of the Liability of Owners of Sea-Going Ships (1957 Convention) and, indeed, from the United Kingdom’s domestic legislation of 1894.
The 1976 (London) Convention on Limitation of Liability (Article 2) sets out new standards and provides that:
“A person liable shall not be entitled to limit his liability if it is proved that the loss resulted from his personal act or omission committed with the intent to cause such loss, or recklessly and with the knowledge that such loss would probably result”
Under the previous regulations, behavior that would prevent the limitation of liability was referred to as the “actual fault or privity rule.” “Actual fault” is self-explanatory, while “privity” refers to the fault that the individual seeking to limit their liability was privy to. This includes faults that they knew about or should have known about through “Constructive Knowledge”. Constructive Knowledge is the type of knowledge that a court will attribute to an individual, stating that “under the given circumstances, this person ought to have been aware of this incident.” Regarding the phrase “or recklessly and with the knowledge that such loss would probably result,” there exist comparable challenges in how the court shall construe these terms. How does one ascertain recklessness? Will the criterion used be ‘subjective’ in the sense of what the defendant himself believed? Did the defendant appreciate that they were undertaking a risk? Or will the criterion be ‘objective’ in the sense of whether a reasonable person would have perceived that a risk was involved? What kind of ‘knowledge’ is required? “Actual” knowledge, meaning what the defendant actually knew, or “Constructive Knowledge,” meaning what a reasonable person would have known in all circumstances? There is no doubt that the coming years will witness prolonged legal disputes on these issues.
Regarding the matters arising from the 1976 (London) Convention on Limitation of Liability, it is worth noting a further modification introduced by the 1976 Convention. This amendment pertains to the allocation of the “burden of proof” for limited benefits entitlement. In accordance with the International Convention Relating to the Limitation of the Liability of Owners of Sea-Going Ships (1957 Convention), the burden of proof was placed squarely upon the party seeking to limit liability, requiring them to demonstrate their entitlement to do so. In other words, the party wishing to limit their liability bore the responsibility of proof, having to exhibit a lack of fault or privity. Conversely, under the 1976 (London) Convention on Limitation of Liability, the point is left somewhat ambiguous and must be determined through the interpretation of the relevant articles.
The 1976 (London) Convention on Limitation of Liability (Article 2 (1)) unambiguously states that claims are subject to liability limitation, creating the impression that if the limitation is to be challenged or contested, it falls to the opposing party, namely the plaintiff, to present compelling evidence proving that the defendant is not entitled to limit their liability in accordance with Article 4 of the 1976 (London) Convention on Limitation of Liability. It appears reasonable to conclude, therefore, that the burden of proof has shifted to the plaintiff.
To understand the meaning of “person liable” as defined by the 1976 (London) Convention on Limitation of Liability, it is crucial to scrutinize the “alter ego” of the corporate entity seeking to limit its liability. In other words, we must investigate the personal acts or omissions of the party in question to ascertain whether they were indeed the direct actions of the company itself. As this issue appears to be the same under the 1976 Convention as under the 1957 Convention, it is presumed that the same “alter ego” test utilized in the International Convention Relating to the Limitation of the Liability of Owners of Sea-Going Ships (1957 Convention) will continue to be applied under the 1976 (London) Convention on Limitation of Liability. The leading case on this matter is the Lady Gwendolen (1965) case, which established the criteria for such a determination. These criteria are as follows:
1- Would the accident still have occurred if the person had acted reasonably?
2- Who was the individual in charge of directing the voyage?
The Marion (1984) Case
A more recent and highly contentious case on this issue was The Marion (1984) case, which was brought before the House of Lords. In this case, the Master of a Liberian tanker anchored at Hartlepool to wait for a berth, and upon dropping the ship’s anchor, it became entangled in an undersea pipeline. The oil companies with an interest in the pipeline sued the ship’s owners, seeking US$ 25 million in direct and consequential damages. Although the shipowner admitted liability, they sought to limit their liability under the existing law, in other words, the International Convention Relating to the Limitation of the Liability of Owners of Sea-Going Ships 1957 Convention (1957 Convention) by arguing that the Ship Master had negligently utilized an outdated chart that failed to indicate the presence of the pipeline. The shipowner had previously assigned the operation and management of the MV Marion to UK-based ship managers, who provided the charts to the ship. During the application to limit liability, the Admiralty judge initially approved the limitation because it was determined that the provision and maintenance of the charts fell solely under the responsibility of the Master. Furthermore, the damages and losses incurred were attributed to the Master’s negligence in utilizing an outdated chart.
However, the Court of Appeal overturned this ruling on the basis that it was the duty of the ship manager to guarantee the existence of a supervised and effective system for chart provision and maintenance, which was lacking in this case. This inadequacy of the system was accentuated by the fact that a Liberian inspectorate report, issued over a year prior to the pipeline incident, had specifically highlighted the absence of proper chart updates, yet had gone unnoticed and unaddressed.
The House of Lords deemed the ship managers’ dereliction of duty as the direct cause of the oil companies’ losses. As a result, the shipowners were deemed legally responsible for the negligence of their managers, and consequently, held personally accountable for the incident. Therefore, the shipowners were denied the privilege of limitation.
The inclusion of the phrase “or recklessly and with the knowledge that such loss would probably result” in Article 4 is rather severe. The term ‘recklessness’ poses challenges in terms of its definition under English law, as it remains unclear whether it should be evaluated objectively or subjectively. To clarify this issue, it may be helpful to refer to a similar scenario under the Warsaw Convention. In the case of Goldman v Thai Airways International (1983), the Court of Appeal ruled that the term ‘recklessly’ (concerning Art 25 of the Warsaw Convention) must be interpreted in conjunction with the phrase “and with the knowledge that damage would probably result”.
Accordingly, it seems that breaking the limitation under the 1976 (London) Convention on Limitation of Liability is more difficult since cases involving recklessness or the intent to cause loss are inherently rarer than those based on personal fault, negligence, or privity.
In the case of The Bowbell (1990), Sheen J remarked that the 1976 (London) Convention on Limitation of Liability (Articles 2 and 4) had the effect of subjecting certain claims to the limitation of liability, unless the claimant could demonstrate that the loss resulted from a personal act or omission of the shipowner, carried out intentionally to cause such loss, or recklessly and with the knowledge that such loss was likely to result. This places a significant burden on the claimant.
According to Article 5 of the 1976 (London) Convention on Limitation of Liability, counter-claims made by the party seeking to limit their liability against parties making claims against them shall be offset. The provisions of the Convention shall then only apply to the remaining balance. This provision is similar to that of the previous Convention and is particularly relevant in cases of collision between two ships, where cross-claims are made. The claims of each party are offset against each other, and payment of the remaining balance is made based on a single liability, with the limitation being applied only to the remaining balance after set-off.
General Limits of Liability
The 1976 (London) Convention on Limitation of Liability (Article 8) measures liability in units of an account, which are known as Special Drawing Rights (SDRs) as defined by the International Monetary Fund. This is different from the 1957 Convention, where the calculation was based on a flat rate of Pointcaré Gold Francs (3,500) multiplied by the tonnage of the ship. Like the 1957 Convention, the 1976 Convention also gives priority to claims for loss of life and personal injury, with a separate calculation for these claims compared to loss or damage to property claims. The limitation funds are calculated on a sliding scale based on the tonnage of the ship.
For claims not covered under Article 7 of the 1976 (London) Convention on Limitation of Liability, the limits of liability arising from a distinct event shall be calculated using the following method:
Regarding claims for Loss of Life or Personal Injury:
1- 333,000 Units of Account for a ship with a tonnage not exceeding 500 tons,
2- For a ship with a tonnage in excess thereof, the following amount in addition to that mentioned in 1:
- For each ton from 501 to 3,000 tons 500 Units of Account
- For each ton from 3,001 to 30,000 tons, 333 Units of Account
- For each ton from 30,001 to 70,000 tons, 250 Units of Account, and for each ton over 70,000 tons, 167 Units of Account.
Regarding any Other Claims:
1- 167,000 Units of Account for a ship with a tonnage not exceeding 500 tons.
2- or each ship with a tonnage in excess thereof the following amount in addition to that mentioned in 1:
- For each ton from 501 to 30,000 tons, 165 Units of Account
- For each ton from 30,001 to 70,000 tons, 125 Units of Account: and, for each ton over 37 tons 83 Units of Account.
If the life and injury fund is insufficient to fully cover the claims made, any outstanding balance of these claims will be considered alongside other claims and paid accordingly (on a pro-rata basis, if necessary) from a second fund.
As a result of the unique nature of their operations, a salvor’s fund under the 1976 (London) Convention on Limitation of Liability (Article 6 (4)) will be calculated based on a notional tonnage of 1,500 tons.
The process for distributing the fund is outlined in Article 12 of the 1976 (London) Convention on Limitation of Liability. The fund will be distributed among claimants based on the proportion of their established claim against the fund. If a claim has already been settled by the liable party or their insurer before the fund is created, that party or their insurer will acquire the rights of the original claimant through subrogation under the Convention. This pro rata distribution of available funds is similar to the method used under the 1957 Convention.
Other Provisions in Respect of the Fund
The 1976 Convention on Limitation of Liability (also known as the London Convention) includes Article 13, which states that once a limitation fund has been established, any person who has a claim against the fund is prohibited from pursuing any other assets belonging to the party on whose behalf the fund was created. Additionally, if a ship or other property has been seized in relation to a claim made against the fund, it can be released by order of the court or under certain circumstances listed in Paragraph 2 of Section 2 of the Convention.
The 1976 Convention on Limitation of Liability (also known as the London Convention) has been linked to existing United Kingdom law through specific provisions. These provisions can be found in Part II of Schedule 4 of the Merchant Shipping Act 1979. Some examples of these provisions include:
1- Excluded claims, referring specifically to oil pollution and nuclear damage, are delineated as those which arise under the auspices of Section 1 of the Merchant Shipping (Oil Pollution) Act 1971 and Sections 7 to 11 of the Nuclear Installations Act 1965.
2- To convert the amounts mentioned in Articles 6 and 7 from SDR to sterling, it shall be deemed that one SDR is equal to a certain sum in sterling, as fixed by the IMF, which is considered equivalent to one SDR for a) as of the relevant date. Since November 1984, the calculation shall be made through direct reference to the SDR/sterling exchange rate, which is calculated daily by the IMF and published each day in the financial press and/or ‘Lloyd’s List’. The relevant date for determining the exchange rate is the date on which the limitation fund is constituted if a limitation action is brought, or the date of the judgment in question in any other case.
Currently, courts tend to adopt a more flexible approach when assessing fair rates of interest in limitation actions. As such, an outdated fixed rate is often disregarded in favor of modern rates. Additionally, considerations of public policy may not necessarily be regarded as relevant in such assessments.
3- Any lien or right pertaining to a ship or property shall not impact the distribution proportion of the Funds.
4- The 1976 (London) Convention on Limitation of Liability (Article 7) pertains to limitations on passenger claims. However, it seems to be in direct contradiction with Article 7 of the Athens Convention, which lays out the limitation amount for such claims.
While both the 1976 (London) Convention on Limitation of Liability and the Athens Convention have the same limitation figure (46,686 SDR or units of account), there is a discrepancy in how the limit is calculated for passenger claims. Under the Athens Convention, the limit is calculated by multiplying the figure by the actual number of passengers on board who are traveling and are injured or killed. In contrast, the 1976 (London) Convention on Limitation of Liability sets the limit at an amount reached by multiplying the same figure (46,666 SDR) by the number of passengers that the ship’s certificate allows it to carry. Therefore, the limitation fund under the 1976 Convention is not influenced by the actual number of passengers on board and claiming. Furthermore, there is a separate figure under the Athens Convention when the carrier’s principal place of business is located in the United Kingdom.
The reconciliation of these two separate articles, which pertain to the same subject matter but have different limitation calculations, is not clear. As of yet, there has been no test case before the English courts specifically addressing this issue since the 1976 Convention was implemented in Britain, although the Athens Convention had already been in effect at that time. The closest instance that could have been a test case was the unfortunate incident involving the Herald of Free Enterprise, but the matter was not brought before the court in the context of limitation of liability.
The Athens Convention (Article 19) stipulates that “this Convention shall not modify the rights or duties of the carrier, the performing carrier, and their servants or agents provided for in the International Conventions relating to the limitation of liability of owners of seagoing ships.” Moreover, the Merchant Shipping Act 1995 (Article 12) states that the Athens Convention does not affect the operation of section 185 of the 1995 Act. Additionally, Article 13 notes that Section 186 does not absolve a person of any liability imposed on them by the Convention. It appears that the carrier may be able to utilize the lower limitation figure provided in the 1976 (London) Convention on Limitation of Liability.
5- The 1976 (London) Convention on Limitation of Liability (Article 6) outlines the calculation method for limitation tonnage. There is a notable difference in the calculations between the 1957 Convention (and the Merchant Shipping Act 1894 Section 503) and the 1976 Convention, as the former uses “registered tonnage” while the latter employs “gross tonnage.” The gross tonnage is determined based on the appropriate tonnage measurement rules included in the International Convention on Tonnage Measurement of Ships 1969. Each ship is assigned a gross tonnage and a net tonnage, with the latter serving to provide an estimate of the ship’s earning capacity. The former represents the ship’s actual size in physical terms. The United Kingdom adopted the 1969 Convention in 1982 through the Merchant Shipping (Tonnage) Regulations 1982, which mandated that all UK-registered ships exceeding 24 meters in length and are new, as well as any older ships that have been substantially modified to alter their gross tonnage, must be measured according to the new regulations.
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.
Shipowner’s Limitation of Liability Act in the United States
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.
Who may limit liability under the 1976 (London) Convention on Limitation of Liability?
The 1976 Convention on Limitation of Liability for Maritime Claims (LLMC), as amended by the 1996 Protocol, is an international agreement that allows shipowners and other parties involved in the maritime industry to limit their liability in certain situations. Under the Convention, the following parties may limit their liability:
- Shipowners: The term “shipowner” is used in a broad sense under the Convention, covering not only the registered owner of a ship but also charterers, managers, and operators, regardless of whether they are registered as the ship’s owner or not.
- Salvors: Salvors, those who undertake salvage operations to save property or people from danger at sea, can also limit their liability under the LLMC, provided that the salvage operation was carried out with the consent of the shipowner or under the authority of a public authority.
- Insurers: Liability insurers, such as protection and indemnity (P&I) clubs, can also limit their liability under the Convention to the same extent as the insured party.
It is important to note that the Convention sets specific limits of liability depending on the type and size of the ship, as well as the nature of the claim, and these limits can be updated periodically. Moreover, the right to limit liability may be lost if it is proven that the loss or damage resulted from the personal act or omission of the party seeking to limit liability, committed with the intent to cause such loss or damage, or recklessly and with the knowledge that such loss or damage would probably result.
Why does the concept of limitation exist in respect of shipping claims?
The concept of limitation of liability in respect of shipping claims exists for several reasons. These include promoting maritime trade, ensuring fairness, encouraging investment, and providing predictability for stakeholders involved in the industry. Here are some key reasons behind the existence of limitation of liability in maritime claims:
- Ensure fairness: Limitation of liability seeks to strike a balance between the interests of shipowners and claimants. While it protects shipowners from potentially catastrophic claims that could put them out of business, it also ensures that claimants receive compensation for their losses up to a predetermined limit. This balance is intended to be fair for all parties involved.
- Promote maritime trade: The shipping industry plays a crucial role in global trade, and limitations of liability help maintain a balance between the interests of various stakeholders. By limiting potential financial exposure, the industry remains attractive to shipowners and investors, encouraging them to participate in maritime trade and facilitating the growth of global commerce.
- Encourage investment: The concept of limitation of liability provides a degree of financial security for shipowners and investors. By knowing the maximum potential exposure to claims, investors can better assess the risks involved in the shipping industry and make informed decisions about their investments.
- Risk allocation and predictability: Limitation of liability helps allocate risks between parties in a predictable manner. It provides a clear framework for handling claims, which can lead to quicker resolution of disputes, reduction of litigation costs, and more efficient operations for both shipowners and claimants.
- Protection for smaller businesses: Limitation of liability helps protect smaller shipowners and operators who may not have the financial resources to cope with large claims. By establishing a cap on the amount they can be held liable for, the Convention ensures that smaller businesses remain viable and can continue to contribute to the shipping industry.
The concept of limitation of liability in respect of shipping claims is essential for maintaining a healthy and robust maritime industry by balancing the interests of various stakeholders, promoting trade, and providing predictability and financial security.
What are the reasons for limitation of liability and the development of the limitation rules in shipping?
The reasons for the limitation of liability and the development of limitation rules in shipping are rooted in the unique nature of the maritime industry and the need to balance the interests of various stakeholders. These reasons include the following:
- Historical context: The concept of limitation of liability in shipping can be traced back to ancient maritime laws and customs. These early rules aimed to encourage maritime trade by providing shipowners with a measure of protection against potential losses or claims arising from maritime incidents.
- Promote maritime trade: Limitation of liability in shipping helps create a stable environment for the growth of maritime trade by providing shipowners and operators with a predictable and manageable level of financial risk. This encourages participation in the industry and facilitates the flow of goods and services across the globe.
- Risk allocation and predictability: Limitation rules in shipping provide a clear framework for handling claims and allocating risks among parties involved in maritime incidents. By setting predetermined limits on liability, these rules create a more predictable and efficient system for resolving disputes, which can reduce litigation costs and facilitate quicker resolution of claims.
- Encourage investment: Limitation of liability rules in shipping make the industry more attractive to investors by providing a level of financial security. By knowing the maximum potential exposure to claims, investors can better assess the risks involved in the shipping industry and make informed decisions about their investments.
- Balance of interests: Limitation rules in shipping strike a balance between the interests of shipowners, who need protection from potentially catastrophic claims, and claimants, who seek compensation for their losses. By setting limits on liability, these rules ensure that claimants receive compensation while preventing shipowners from facing financial ruin due to excessive claims.
- Protection of smaller businesses: Limitation of liability in shipping helps protect smaller shipowners and operators who may not have the financial resources to cope with large claims. By establishing a cap on the amount they can be held liable for, the limitation rules ensure that smaller businesses can continue to contribute to the shipping industry.
The reasons for limitation of liability and the development of limitation rules in shipping are centered on creating a balanced, predictable, and stable environment for maritime trade, while ensuring fairness for all parties involved and encouraging investment in the industry.
What are the Limitation Funds in Shipping?
Limitation funds in shipping refer to a legal concept designed to limit the liability of shipowners in the event of maritime accidents. These funds are governed by international maritime conventions, such as the International Convention on Limitation of Liability for Maritime Claims (LLMC) and its 1996 Protocol, which set limits on the amount a shipowner can be held liable for in case of loss or damage to property, loss of life, or personal injury.
The purpose of limitation funds is to provide a balance between the interests of shipowners and claimants by protecting shipowners from excessive financial exposure, while ensuring that claimants receive fair compensation for their losses.
The distribution of limitation funds typically follows these steps:
- Establishment of a limitation fund: When a maritime accident occurs, and claims are expected to arise, the shipowner may establish a limitation fund. This fund is calculated based on the ship’s tonnage and the limits set by the relevant maritime convention. The shipowner deposits the calculated amount into a court or other competent authority in a country that is party to the convention.
- Notification to claimants: Once the limitation fund is established, the relevant authority notifies potential claimants. Claimants are then required to submit their claims within a specified period.
- Assessment and distribution: The authority responsible for administering the limitation fund assesses the submitted claims and distributes the funds among the claimants. This distribution is generally done on a pro-rata basis, meaning that each claimant receives a share of the fund proportional to the value of their claim relative to the total value of all claims.
- Release of liability: Once the limitation fund has been distributed, the shipowner is generally released from further liability relating to the maritime accident, provided they have acted in good faith and without any intent to cause the accident.
It is important to note that not all claims are subject to limitation. Some circumstances, such as willful misconduct or gross negligence by the shipowner, can result in the loss of their right to limit liability. Additionally, some claims, like those relating to pollution, may be subject to different limitation regimes under other international conventions.
What is 1957 Convention on Limitation of Liability?
The 1957 Convention on Limitation of Liability, officially known as the International Convention Relating to the Limitation of the Liability of Owners of Sea-Going Ships, is an international treaty that aimed to establish a uniform set of rules for limiting the liability of shipowners in cases of maritime accidents. This convention was adopted on October 10, 1957, in Brussels, Belgium, and entered into force on June 1, 1968.
The 1957 Convention set out limits on shipowners’ liability based on the tonnage of the ship, in cases involving loss or damage to property, loss of life, or personal injury. By establishing these limits, the convention aimed to balance the interests of shipowners and claimants, providing fair compensation for losses while protecting shipowners from excessive financial exposure.
However, over time, it became evident that the 1957 Convention needed updating to reflect changes in the shipping industry and the value of money. This led to the development and adoption of the 1976 International Convention on Limitation of Liability for Maritime Claims (LLMC), which replaced the 1957 Convention. The LLMC introduced higher limits for shipowners’ liability and has since been amended by the 1996 Protocol to further increase these limits.
As a result, the 1957 Convention on Limitation of Liability is no longer widely used in the shipping industry, with the 1976 LLMC and its 1996 Protocol being the prevailing international instruments for limiting shipowners’ liability in maritime claims.
How are the Limitation Funds distributed in shipping?
The distribution of limitation funds in shipping follows a specific process to ensure that claimants receive fair compensation for their losses while protecting shipowners from excessive financial exposure. Here’s a summary of the steps involved in the distribution of limitation funds in shipping:
- Establishment of a limitation fund: When a maritime accident occurs and claims are expected to arise, the shipowner may create a limitation fund. This fund is calculated based on the ship’s tonnage and the limits set by the relevant maritime convention, such as the International Convention on Limitation of Liability for Maritime Claims (LLMC) and its 1996 Protocol. The shipowner deposits the calculated amount with a court or other competent authority in a country that is party to the convention.
- Notification to claimants: After the limitation fund is established, the relevant authority notifies potential claimants. They are then required to submit their claims within a specified period.
- Claims assessment: The authority responsible for administering the limitation fund assesses the submitted claims to determine their validity and value. This process may involve verifying the legitimacy of the claims, evaluating the damages sustained, and considering any contributory factors, such as shared fault or negligence.
- Distribution of funds: Once the claims have been assessed, the authority distributes the limitation fund among the claimants. Generally, this distribution is done on a pro-rata basis, meaning that each claimant receives a share of the fund proportional to the value of their claim relative to the total value of all claims. In some cases, priority may be given to certain types of claims, such as those related to personal injury or loss of life.
- Release of liability: After the limitation fund has been distributed, the shipowner is usually released from further liability relating to the maritime accident, provided they have acted in good faith and without any intent to cause the accident.
It is important to note that not all claims are subject to limitation. Some circumstances, such as willful misconduct or gross negligence by the shipowner, can result in the loss of their right to limit liability. Additionally, some claims, like those relating to pollution, may be subject to different limitation regimes under other international conventions.
What is Article 4 LLMC 1976?
Article 4 of the International Convention on Limitation of Liability for Maritime Claims (LLMC) 1976 deals with the conduct that prevents a shipowner from limiting their liability. According to Article 4, a shipowner cannot limit their liability if it is proven that the loss, damage, or injury resulted from their personal act or omission, committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result.
In other words, if a shipowner is found to have acted intentionally or with gross negligence, leading to loss or damage to property, loss of life, or personal injury, they cannot rely on the limitation provisions set out in the LLMC 1976. This article ensures that shipowners are held accountable for their actions and cannot escape liability when their behavior is found to be willful, reckless, or grossly negligent.
What are the limitations of liability in maritime claims?
Limitations of liability in maritime claims are legal provisions that restrict the extent to which a shipowner can be held financially responsible for damages, losses, or injuries resulting from maritime accidents. These limitations are primarily governed by the International Convention on Limitation of Liability for Maritime Claims (LLMC) 1976 and its 1996 Protocol, which set out specific limits based on the ship’s tonnage.
The LLMC covers various types of claims, including:
- Loss of life or personal injury: Claims arising from the loss of life or personal injury to passengers and crew members.
- Loss or damage to property: Claims resulting from the loss or damage to other ships, cargo, or other property.
- Wreck removal: Claims related to the costs of removing the wreck of a sunken ship that poses a hazard to navigation or the environment.
- Environmental damage: Claims arising from pollution caused by the ship, including oil spills and other hazardous substances.
The limits of liability are calculated based on the ship’s tonnage, expressed in units called “gross tonnage” (GT), and vary depending on the type of claim. For example, under the 1996 Protocol:
- For loss of life or personal injury claims:
- 2 million Special Drawing Rights (SDR) for a ship up to 2,000 GT
- Additional amounts for larger ships, calculated using a sliding scale
- For property claims:
- 1 million SDR for a ship up to 2,000 GT
- Additional amounts for larger ships, calculated using a sliding scale
It is important to note that these limits may be periodically updated, and the actual values should be verified using the most recent legislation or conventions.
There are situations in which a shipowner may not be able to limit their liability, such as when the loss or damage results from their personal act or omission, committed with the intent to cause the loss, or recklessly and with knowledge that the loss would probably result (as stated in Article 4 of the LLMC 1976).
Additionally, some claims may be subject to different limitation regimes under other international conventions, such as those related to pollution under the International Convention on Civil Liability for Oil Pollution Damage (CLC) or the International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea (HNS Convention).
What conduct will bar a person’s right to limit his liability in shipping?
In shipping, a person’s right to limit their liability can be barred if their conduct is found to be willful, reckless, or grossly negligent. According to Article 4 of the International Convention on Limitation of Liability for Maritime Claims (LLMC) 1976, a person (such as a shipowner) cannot limit their liability if it is proven that the loss or damage resulted from their personal act or omission, committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result.
In simpler terms, a person’s right to limit liability may be barred in the following situations:
- Intentional acts: If the person intentionally causes the maritime incident or intentionally contributes to the loss or damage, their right to limit liability will be barred.
- Recklessness: If the person acts recklessly, knowing that their actions are likely to result in loss or damage, they will not be able to limit their liability.
- Gross negligence: If the person’s conduct demonstrates a significant departure from the standard of care expected in the circumstances, showing a severe disregard for the safety of people or property, their right to limit liability may be barred.
It is crucial to note that the burden of proof lies with the claimant, who must demonstrate that the person’s conduct meets the criteria specified in Article 4 of the LLMC 1976 to bar their right to limit liability.
For what types of claims may limitation be sought in shipping?
In shipping, limitation of liability can be sought for various types of claims resulting from maritime incidents. The International Convention on Limitation of Liability for Maritime Claims (LLMC) 1976 and its 1996 Protocol are the primary governing instruments for these limitations. The types of claims for which limitation may be sought include:
- Loss of life or personal injury: Claims arising from the loss of life or personal injury to passengers and crew members onboard the ship or other individuals involved in a maritime accident.
- Loss or damage to property: Claims resulting from the loss or damage to other ships, cargo, or property, such as in cases of ship collisions or damage caused during loading and unloading operations.
- Wreck removal: Claims related to the costs of removing the wreck of a sunken ship that poses a hazard to navigation or the environment.
- Environmental damage: Claims arising from pollution caused by the ship, including oil spills and the release of other hazardous substances into the marine environment.
- Salvage operations: Claims related to the remuneration of salvors who assist in saving a ship or its cargo in danger or preventing environmental damage.
- General Average (GA): Claims related to the general average, a principle of maritime law where the financial burden of an extraordinary sacrifice or expenditure voluntarily made to preserve a maritime adventure (e.g., jettisoning cargo to save the ship) is shared proportionally by all parties involved.
It is important to note that some claims may not be subject to limitation under the LLMC, such as those arising from the shipowner’s willful misconduct or gross negligence. Additionally, certain claims may fall under different limitation regimes governed by other international conventions, such as the International Convention on Civil Liability for Oil Pollution Damage (CLC) or the International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea (HNS Convention).