Limitation of Liability

Limitation Of Liability

1. Scope Of The 1976 London Convention On Limitation Of Liability For Maritime Claims

The 1976 LLMC and its 1996 Protocol are in force in the UK. An amendment to the 1996 Protocol was agreed on 19 April 2012 and came into force on 8 June 2015. The UK enacted the new limits which are, since 30 November 2016, in force in the UK. We will refer to the amended 1976 LLMC as the 1996 LLMC.

The Protocol has not changed the substance of the Convention but has increased the limits of liability considerably, by 250 per cent. The Convention and the Protocol set out a mechanical formula for limitation based on the tonnage of the vessel in relation to which liability has arisen which is multiplied by a unit of account, known as the Special Drawing Rights (SDR). A maximum global fund is thus set up for all the claimants who rank equally, pari passu; in other words, no claimant has priority to be paid but claimants for personal injury or loss of life are given priority. The higher limits provided by the Protocol will only apply to claims arising out of an occurrence which took place after the entry into force of the Protocol for each individual state.

The Privy Council, in The Cape Bari, has confirmed that the right to limit liability can be excluded contractually but this requires clear wording.

2. Who Is Entitled To Limit Liability?

Article 1 of the 1996 LLMC prescribes that ‘shipowners’, salvors, persons for whose acts the shipowner or the salvor are responsible and the insurers of particular liabilities have the right to limit their liability. The registered owner, the charterer, the manager and the operator of a seagoing ship are deemed to be within the convention’s definition of a shipowner and thus entitled to limit their liability. The liability of these persons for actions against the ship (in rem) is also subject to limitation. Demise charterers also enjoy the right to limit liability. The term ‘charterer’ includes a time charterer and voyage as well as slot charterers.

The ship’s managers and operators are also entitled to limit their liability. The ordinary meaning of the words would certainly include the managing owners but it is uncertain whether managers and operators of a part of the shipping activity, for example, recruitment, would be covered.

Persons for whose act, neglect or default the shipowner or the salvor are responsible are also entitled to limited liability. The purpose of this provision is to avoid circumvention of the right to limit by claimants suing the individual wrongdoer rather than the shipowner. 

When salvors operate from a ship they are considered to be shipowners and therefore are entitled to limit their liability. However, when they do not operate from a ship they will not fall under the definition of a shipowner (The Tojo Maru). The 1976 LLMC was modified so that salvors are always entitled to limit their liability.

Liability insurers of shipowners in respect of claims subject to limitation are also given the right to limit liability under the 1976 LLMC. Persons entitled to limit liability under the 1976 LLMC may of course bring claims against each other. Their contractual relationship will determine the legal basis of such claims. If, for example, there is a cargo claim against the charterer, the charterer would be entitled to limit their liability against the cargo owner. However, if the charterer pays the claim in full and then tries to recover from the shipowner, the shipowner would be entitled to limit their liability against the charterer in exactly the same way as if the claim was directly from the cargo owner against the shipowner. However, when the cargo claim is brought against the shipowner who pays up and then tries to recover from the charterer, in such a case is the charterer also entitled to invoke limitation of liability against the shipowner? Such a result would be a significant expansion of the scope of limitation beyond the protection of the shipowner, who may consequently face limited recovery for damages incurred in their shipping business.

The historical development of limitation of liability suggests that a charterer would only be entitled to limit their liability where they act ‘in the shoes’ of the shipowner. To this effect were the first instance decisions in The Aegean Sea and in The CMA Djakarta. However, the first instance decision in The CMA Djakarta was unanimously reversed by the Court of Appeal. The Court of Appeal noted that the construction of any international convention should be made without any English law preconceptions and that it must not be controlled by domestic principles of construction. This has been confirmed in the Supreme Court decision Gard Marine and Energy Limited v China National Chartering Company Limited and others (Ocean Victory). It also noted that the ordinary meaning of the word ‘charterer’ includes a charterer, whether it acts as a charterer or in any other capacity. As a result, charterers as well as managers and operators enjoy the same rights as shipowners, thus making the effect of the 1996 LLMC much wider than shipowners would have expected.

2. Claims Subject To Limitation Of Liability

Claims under Art.2 and not excluded by Art.3 of the 1976 LLMC are subject to limitation.

Loss of life, personal injury, loss of or damage to property claims, as well as consequential losses, are all subject to limitation provided that they occur either on board or in direct connection with the operation of the ship or a salvage operation (Art.2(1)). While damage on board is rather well defined, the extent of the term ‘direct connection with the operation of the ship’ is not as easy to determine. The term expresses the ‘necessary linkage’ between the loss suffered and ‘the ship in respect of which a claim is made’ (see Caspian Basin Specialised Emergency Salvage Administration v Bouygues Offshore SA (The Caspian Basin).

In The Caspian Basin, Rix J considered whether a claim for loss of a tow arising in part out of misrepresentation as to the tug’s bollard pull and brake horsepower (BHP) was a claim ‘occurring … in direct connection with the operation of the ship’ within Art.2(1)(a) of the 1976 LLMC. His decision was based on the fact that the loss claimed was that of the tow which he held to be in direct connection with the operation of the ship. (See also The Breydon Merchant and The Darfur). In The Aegean Sea destruction of the bunkers, pollution damage and clean-up costs arising from the grounding of a vessel on rocks because of the breach of a safe port warranty under an ASBATANKVOY charterparty were also ‘in direct connection with the operation of the ship’.

In The CMA Djakarta cargo claims arising from the shipment of undeclared dangerous goods under a charterparty were also considered to be ‘in direct connection with the operation of the ship’ and thus subject to limitation.

Both in The Aegean Sea and The CMA Djakarta, which involved indemnity claims by the shipowners against the charterers, all five judges considered the wording of Art.2(1)(a) as incapable of including in the limitation right damage suffered by the ship by reference to which the limits of liability are calculated. 

Therefore, such claims, usually brought by the owner against the charterer, are not subject to limitation of liability. The Supreme Court has approved these decisions on the point in The Ocean Victory. In The Darfur, following the collision of the Darfur with the Happy Fellow, claims by the charterer of the Darfur against the shipowner in respect of the Darfur being off hire, increased insurance costs to cover the deviation after the collision, discharge and transhipment costs for the cargo, loss of use of the relevant containers for the period between the casualty and transhipment, hiring, bunkering and insuring alternative tonnage, loss of business and loss of profit were all considered to be claims consequential to the loss of the vessel and thus not subject to limitation.

Under Art.2(1)(c) claims in respect of other loss resulting from infringement of rights other than contractual rights, occurring in direct connection with the operation of the ship or salvage operations, are also subject to limitation of liability. While Art.2(1)(a) is concerned with losses and damage linked with property damage or loss of life, Art.2(1) (c) covers claims from parties that may have suffered losses not linked to property damage.

In The Aegean Sea loss of use and loss of profit by users of the sea and the coasts, in particular owners of fishing boats and yachts, fish and shellfish farm owners, local shop owners, local municipalities, local governments and the coastal state were held to fall in this category. 

The category is very broad, and taking into account that Art.2 is not restricted in general by the legal nature of the claim, the only evident exclusion is that of contractual rights as expressed in the provision itself. Therefore, any actionable rights available through national or international law to users of the coastal environment or any relevant infrastructure are probably included in this section and are thus subject to limitation. Recovery of freight not earned and lost following damage to the ship has been held not to fall within this category of claims as it is based on a contractual right.

Under Art.2(1)(d) claims in respect of the raising, removal, destruction or the rendering harmless of a ship which is sunk, wrecked, stranded or abandoned, including anything that is or has been on board such ship are also subject to limitation of liability. Claims for wreck raising, removal, etc. differ from other property and consequential claims in the sense that the party claiming could be under a duty to keep the waterways clear of objects and therefore public funding will probably have to meet the costs that exceed limitation. To avoid this consequence (The Stonedale (No.1) for the earlier position) the UK has made a reservation in respect of this provision (MSA 1995, Schedule 7, Part II, Art.3(1)) and all claims in respect of wreck raising, removal, etc. are not subject to limitation of liability.

Article 2(1)(e) provides that claims in respect of removal, destruction or rendering harmless of the cargo of a ship are subject to limitation of liability. This section concerns cargo-related operations in general irrespective of whether the ship is distressed or sunk.

Article 2(1)(f) provides for claims of a person other than the person liable in respect of measures taken in order to avert or minimise loss for which the person liable may limit their liability in accordance with the 1996 LLMC. It further provides for losses caused by such measures to be subject to limitation of liability. These claims are, in essence, assistance services and clean-up costs undertaken by persons who cannot be considered as salvors. This provision avoids the situation by which a claim would be limited but the claim for prevention of the loss would be unlimited. In The Breydon Merchant a claim by cargo owners against the shipowner for salvage liability caused by unseaworthiness was considered to be within this article, as it was a claim for measures taken to prevent or minimise the loss to cargo for which the shipowner would have been able to limit liability.

3. Claims Excluded From Limitation Of Liability

Any claim which does not fall within the wording of Art.2 is not subject to limitation of liability. In addition, for general policy reasons some claims under Art.2 are expressly exempted from limitation of liability. 

These exemptions can be found in Art.3. In particular, claims for salvage including special compensation under Art.14 of the 1989 Salvage Convention are not subject to limitation. Otherwise, salvors may become reluctant to undertake salvage. However, the exemption only covers direct claims from salvors and not indemnity claims for salvage expenses under the contract of carriage. 

Claims for oil pollution damage covered by the International Convention on Civil Liability for Oil Pollution Damage 1992 are also excluded because the 1992 Convention contains an independent special liability regime which includes limits of liability. Damages arising from nuclear damage which are subject to national or international legislation and damages by nuclear ships are also excluded under Art.3(c).

The final category of claims excluded from limitation is described in Art.2(e) which concerns the servants of the owner and salvors. Their claims are not universally excluded from limitation, but it is left to the law governing their contract to decide whether these will be allowed in full or limited to any amount which is higher than that under Art.6 of the 1996 LLMC. Section 185(4) MSA 1995 excludes from limitation of liability personal injury and death as well as property loss claims made by a person employed under a contract of service governed by the law of any part of the UK. The application of the particular section of MSA 1995 depends on whether the established relationship between such parties and the shipowner is a contract of service. In The Margaretha Maria the Court of Appeal considered that a claim by the estate of drowned fishermen who were working on the vessel under a share profits arrangement meant that losses as well as profits were to be shared. In addition, the deceased paid tax and national insurance on the basis that they were self-employed. These indicated that the deceased were not under a contract of service and their claims were not covered by the exemption under Art.3(3); thus they were subject to the shipowner’s right to limited liability.

The claims exempted under Art.3 cover direct claims against a shipowner. These ought to be paid in full to the claimant. However, if after payment the shipowner seeks an indemnity from another shipowner, for example a charterer, the indemnity claim is not generally a claim covered by Art.3, and the second shipowner does have the right to limit liability.

4. Conduct Barring Limitation Of Liability

The right to limit liability confers a number of benefits on the shipowner. First, since the liability is limited and known the shipowner can insure itself. Second, by providing the limitation amount to the court it has essentially discharged all its liability for the claims subject to limitation, and the ship and other assets should be free from other actions, for example, arrest.

However, the history of limitation of liability indicates that where the right to limit liability can be removed easily two consequences follow:

a) Claimants will routinely challenge the right simply to prevent the shipowner from limiting liability and thus sustaining actions against the shipowner’s ships and exerting commercial pressure.

b) Judges would in several cases be tempted to find such negligence in order to satisfy claims, especially where loss of life or personal injury was suffered.

Under both the 1957 Limitation Convention and the 1976 LLMC as amended, for the right of limited liability to be removed there must be an act or omission by the shipowner. This requirement does not include acts by servants or agents of the shipowner but only acts of those officials of the shipowning company who embody the company.

Therefore, cases under the 1957 Limitation of Liability Convention remain relevant with respect to the question of identifying those whose actions or omissions are those of the shipowner.

However, the type of action that led to losing the right to limit liability differs significantly between the two legal regimes. Until the coming into force of the 1976 LLMC the test for removing the right to limit liability was that of the 1957 Limitation Convention. The burden of proof was on the company claiming to limit liability, and in particular it had to show that the loss or damage occurred without its actual fault or privity.

Privity was interpreted in the same way as under s.39(5) of the Marine Insurance Act 1906. Therefore, the leading case on whose privity would be relevant is The Eurysthenes, a case in which Lord Denning MR at the Court of Appeal set the benchmark of the test. 

For examples of cases on limitation see Lennard’s Carrying Co v Asiatic Petroleum; The Lady Gwendolen; The Marion; The Garden City.

The test under the 1976 LLMC became much tighter. Article 4 of the Convention requires:

“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 intent to cause such loss, or recklessly and with knowledge that such loss would probably result.”

So the burden of proof under the 1976 LLMC is upon the person seeking to break limitation.

The test is evidently very difficult to satisfy because it requires a number of elements to be present at the time the act or omission in question took place.

For collisions, two possible interpretations have been outlined. The Court of Appeal stated that in a collision between Ships A and B the test under Art.4 could have two interpretations: either that the cargo-/shipowners of Ship A must prove that the owner of Ship B intended that it should collide with Ship A, or acted recklessly with the knowledge that it was likely to do so; or that the claimant merely has to prove that the owner of Ship B intended that their ship should collide with another ship, or acted recklessly with the knowledge that it was likely to do so (The Leerort). The Court of Appeal did not decide which of the two interpretations is the correct one.

The generally accepted strictness of the test, which only slightly lowers the requirement from one of an intentional act, has led to the statement that as far as collisions are concerned Art.4 cannot, in general, be satisfied. Consequently, the liability of the shipowner will be limited in all but the most exceptional cases and the court will issue a declaration to this effect, i.e. a limitation decree would be directly available to the shipowner.

However, the limitation decree was not granted in an exceptional case (The Saint Jacques II and Gudermes). The facts of the case can be summarised as follows: a fishing vessel which routinely navigated the 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 intent to cause such loss, or recklessly and with knowledge that such loss would probably result.

Channel at the wrong side of the traffic separation scheme, under the command of its owner who was also the master, collided with an oncoming vessel. The owner/master admitted that the navigation was reckless but claimed that the element of knowledge was missing because the real test was one that required knowledge of the particular loss that occurred, which in this case was collision damage caused to the specific vessel and that, as at the time of the collision he was in his cabin sleeping, he did not have such knowledge. The question was whether the limitation decree would be issued without a hearing as suggested for the routine collision cases in The Leerort. The judge declined to grant the limitation decree as he considered this to be a case where there was a reasonable prospect that Art.4 could be fulfilled. The case was settled before reaching the court. Thus, the case provides only an example of what type of conduct may be considered as possibly risking the loss of the right to limit liability and confirms the discretion of the courts to issue a limitation decree, but arguably not much more.

In a Canadian case, the Canadian Supreme Court – reversing the lower courts’ decisions – held that the defendant fisherman was entitled to limit liability despite the fact that the damage was caused by an intentional act (Peracomo Inc v Société Telus Communications Co). The master and owner of a fishing vessel got his fishing gear caught in a cable belonging to a communication company and, thinking that it was abandoned, brought it on board and cut it with an electric saw. This happened twice. As the fisherman was also the owner of the fishing boat his actions were the company’s actions. The Canadian Appeal Court held that as a result of cutting the cable he was deprived from the right to limit liability. Notably, the conduct was also considered wilful misconduct, enabling the insurers to avoid the contract of insurance. The decision with respect to the right to limit liability was reversed by the Supreme Court of Canada on the basis that the fisherman did not intend to cause the specific loss. Thus, the Supreme Court read the test for limitation as one that is not satisfied by any intentional act or omission but only by an intentional act or omission which is undertaken with knowledge that such damage would probably result. The Supreme Court confirmed the decision of the Appeal Court with respect to the insurance contract.

The right to limit liability was removed for the first time under the 1996 LLMC before an English court in The Atlantik Confidence where the judge held that the ship had been scuttled. The court decided that the appropriate approach was the same as that followed when determining ‘whether a hull underwriter had proved on the balance of probabilities that a vessel was scuttled’ with a standard of proof which ‘would fall not far short of the rigorous criminal standard’. This statement does not necessarily contradict that made in The Realice because in The Atlantik Confidence the possession of the required knowledge, under Art.4, of the resulting damage was not challenged.

6. Right To A Limitation Decree And The Establishment Of A Limitation Fund

Under English law, shipowners and others seeking to limit liability can choose the jurisdiction in which to establish the limitation fund (The Falstria). By Art.11 of the 1976 LLMC the fund can be constituted by the person liable (or their insurer), who seeks to limit liability by depositing the sum, or a guarantee, required under the Convention with interest and costs in a Convention jurisdiction. 

Once it is established, claimants will be invited to submit their claims to the limitation fund. In this way the person seeking to limit liability has chosen the regime of limitation which is applicable in that jurisdiction.

The English procedure permits the fund to be established by payment into court, by any other way the court accepts, or a combination of the two (Civil Procedure Rule 61.11.18). English law does not require as a prerequisite to a limitation action that the English courts must have jurisdiction on the merits with respect to one or more claims arising from the incident in relation to which limitation of liability is claimed. 

As a result, a limitation decree can be granted to any shipowner who applies to the English court and fulfils the requirements of the 1976 LLMC even if it is clear that the merits of the dispute will have to be determined elsewhere.

Read The Caspian Basin; and The Happy Fellow.

The effect of establishing the limitation fund under Art.11 of the 1976 LLMC in any of the Convention state parties is that a person having made a claim against the fund shall be barred from exercising their rights for such a claim against any assets of the person who has constituted the fund (Art.13(1) of the 1976 LLMC). The court in which the fund has been constituted has discretion to stay any proceedings relating to any claims arising out of that occurrence, which are pending against the person by whom the fund has been constituted (Sched.7, Part II, para.8(3) of the MSA 1995).

Furthermore, the arrest of the relevant ship or any other property (of the person who constituted the fund) within the jurisdiction of a state party for a claim which may be raised against the fund, or any security given, may be released by an order of the court of the same state party (Art.13(2)), unless the claimant can show that there is either a real chance of breaking the limit or that their claim does not come within the 1976 LLMC (The Bowbelle).

Once the release of the ship has been ordered there will be a bar to other actions, but the person seeking to limit claims for which the ship has been released shall be deemed to have submitted to the jurisdiction of the court (Sched.7, Part II, para.10 of the MSA 1995).

Such release is mandatory if the limitation fund has been constituted in the place where the incident giving rise to liability took place, or in the port of disembarkation in respect of personal claims, or in the port of discharge concerning damage to cargo, or in the state where the arrest is made (Art.13(2)). However, Arts.13(1) and 13(2) will apply only if the claimant may bring their claim against the fund before the court administers the fund, and the fund is actually available and freely transferable in respect of that claim (Art.13(3)).

The fund will be distributed pari passu among claimants and no lien or other right in respect of any ship or property shall affect the proportionate distribution, in which, under Art.12 of the 1976 LLMC, the fund is distributed among the several claimants (Sched.7, Part II, para.9 of the MSA 1995). Claims for personal injury or loss of life are treated preferentially to other claims.

In Eleni Maritime Ltd. v Heung-A Shipping Co Ltd, the High Court of Hong Kong held that the period set by the court for claims to be filed against a limitation of liability fund does not override the statutory limitation periods and was extended as in this case there was good reason.

7. Forum Shopping For Limitation Rights

Forum shopping by way of limitation actions is not prohibited by the courts provided the court is satisfied that substantial justice can be done for the interests of all parties. Each case will be determined on its own facts. However, it seems that the courts will discourage forum shopping on the basis of higher limitation applicable by the 1976 LLMC (Herceg Novi v The Ming Galaxy.

a) Outside the European Conventions concerning Jurisdiction and Enforcement of Judgments there is flexibility for forum shopping and the application of the forum non-conveniens doctrine (Herceg Novi v The Ming Galaxy; The Caspian Basin).

b) There is no rule that the liability and the limitation actions cannot be decided in different jurisdictions (The Caspian Basin).

c) Special rules apply when the proceedings are brought in EU member states to the European Conventions concerning Jurisdiction and Enforcement of Judgments. But the Conventions by 4 permit a member state to apply its own domestic law in cases in which the primary rules of the Conventions, such as the domicile rule and the exclusive jurisdiction rules, are not infringed.

d) Also, by 9 of the Recast Regulation, the limitation action cannot be split from the liability action.

e) Once a limitation fund is established, there will be a bar to other proceedings by 13 of the 1976 LLMC. Any other actions instituted later in other EU member state jurisdictions will have to be stayed pursuant to Art.22 of Brussels or Art.28 of the EC Regulation, being related actions (The Happy Fellow).

f) Article 11 of the 1976 LLMC provided for the constitution of a limitation fund in any state party to this Convention in which legal proceedings were instituted in respect of underlying claims. Both 11 and 13 prohibited a claimant who claimed against the fund to have any rights against any other assets of the person seeking to limit liability in any jurisdiction of state parties (ICL Vikraman).

g) But the protection afforded by 13(2) was concerned with the jurisdiction of state parties to the Limitation Convention. If security is sought or is given in a non-state party, Art.13(2) does not empower a court of a state party to order the release of such security (ICL Vikraman).

h) ‘Legal proceedings’ under 13(2) of the 1976 LLMC may include arbitration (ICL Vikraman).

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