The right of shipowners to limit liability for certain types of claims has been a feature of English law in some way for nearly 300 years. The United Kingdom is now a State Party to the 1976 Convention of Liability for Maritime Claims (“LLMC”), as amended by the Protocol of 1996. William Stansfield considers some of the key questions arising from the application of the LLMC in English law.
The historical justification for granting shipowners the right to limit their liability was the public policy of encouraging international trade and promoting economic growth.
These days, the better justification for continuing to give shipowners (and their insurers) the right to limit liability for certain claims is that it helps keeps insurance available at an economic price. This furthers the public policy of there being at least some insurance available in the event of a major maritime incident. The trade-off is that there will, on occasions, be situations where shipowners/insurers can limit their liability for certain types of claims.
The United Kingdom is a State Party to the 1976 Convention of Liability for Maritime Claims (“LLMC”), as amended by the Protocol of 1996. The LLMC as it has the force of law in the United Kingdom may be found here[WS1] .
Who can limit their liability under the LLMC?
Anyone who falls within the definition of “shipowner”. This is defined in the LLMC as “owner, charterer, manager or operator of a seagoing ship.”
Past case law (The MSC Napoli[WS2] ) holds that a slot charterer falls within the definition of “shipowner”. In The X-Press Pearl[WS3] , it was suggested (without finally deciding the point) that a non-vessel operating common carrier (NVOCC) may do as well depending on the precise contractual arrangements.
Salvors can also limit their liability under the LLMC if they are rendering services in direct connection with salvage operations.
Limit liability for what claims?
With some caveats, a shipowner or salvor can limit liability for the claims described in Article 2(1) of the LLMC:
(a)claims in respect of loss of life or personal injury or loss of or damage to property (including damage to harbour works, basins and waterways and aids to navigation), occurring on board or in direct connection with the operation of the ship or with salvage operations, and consequential loss resulting therefrom;
(b)claims in respect of loss resulting from delay in the carriage by sea of cargo, passengers or their luggage;
(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;
(d) N/A – see next question;
(e)claims in respect of the removal, destruction or the rendering harmless of the cargo of the ship;
(f)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 his liability in accordance with this Convention, and further loss caused by such measures.
The Supreme Court has held in The MSC Flaminia [WS4] that a charterer is not to be treated any differently to any of the other types of “shipowner”.
A charterer can therefore limit liability in respect of claims by the vessel owner for losses originally suffered by the shipowner. But this is subject to the important exception that claims in respect of loss or damage to the vessel itself are not limitable claims under Article 2(1)(a).
What about wreck removal costs?
The United Kingdom has opted out of Article 2(1)(d), which covers 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.
So far, the point that arose in the courts of Hong Kong and Australia (The Star Centurion [WS5] and The Goliath [WS6] respectively) about whether liability for wreck removal costs can be indirectly limited under Article 2(1)(a) has yet to arise under English law.
Limit liability to what levels?
The limits of liability are calculated by reference to the gross tonnage of the ship and the Unit of Account known as Special Drawing Rights (SDRs) .
The United Kingdom has adopted the higher 2012limits , which came into force internationally on 8 June 2015.
The applicable limits under English law are:
(a ) in respect of claims for loss of life or personal injury,
(i)3.02 million Units of Account for a ship with a tonnage not exceeding 2,000 tons,
(ii)for a ship with a tonnage in excess thereof, the following amount in addition to that mentioned in (i):
for each ton from 2,001 to 30,000 tons, 1,208 Units of Account;
for each ton from 30,001 to 70,000 tons, 906 Units of Account; and
for each ton in excess of 70,000 tons, 604 Units of Account,
(b) in respect of any other claims,
(i)1.51 million Units of Account for a ship with a tonnage not exceeding 2,000 tons,
(ii)for a ship with a tonnage in excess thereof the following amount in addition to that mentioned in (i):
for each ton from 2,001 to 30,000 tons, 604 Units of Account;
for each ton from 30,001 to 70,000 tons, 453 Units of Account; and
for each ton in excess of 70,000 tons, 302 Units of Account.
The International Monetary Fund publishes the official exchange rate between Special Drawing Rights and various national currencies. See here [WS7] for more details.
Can a limitation fund be constituted by way of security?
A limitation fund may be constituted by way of paying into the Court Funds Office the sterling equivalent of the correct number of SDRs with the correct amount of interest (see below about interest).
A limitation fund may be constituted by way of court-approved security, but the limiting Shipowner will need to make an application to the court for an order approving the security.
What is the position regarding interest?
The limitation fund must include provision for “Article 11(1)” interest.
This is calculated from the date of the occurrence giving rise to the liability until the date of the constitution of the fund.
Under English legislation[WS8] , the interest rate is currently set at 1% over the Bank of England base rate.
When the limitation fund is constituted by way of payment into court, the Court Funds Office pays interest on the fund so there is no need to make provision for Further Interest.
If the limitation fund is constituted by way of court-approved security, the security wording will need to be drafted so that the security sum is “excluding” the Further Interest Payable. The Admiralty Solicitors Group [WS9] publishes on their website form ASG12 which is a template LOU wording.
Do I have to constitute a limitation fund?
No – a limiting shipowner can just seek a limitation decree without constituting a fund.
There will be occasions where it is not necessary to constitute a fund, such as if there is only one person with a claim arising out of an incident for which limitation is sought.
Can limits be broken?
In theory yes, but it is very difficult. Past case law (see, The Solong[WS10] ) describes the limits as “virtually unbreakable”.
The only reported case where limits have been successfully broken is The Atlantik Confidence[WS11] , where cargo owners successfully showed that the vessel had been deliberately scuttled on the instructions of the director and shareholder of the shipowner.
What is the procedure for setting up a limitation fund?
A Limitation Claim Form must be issued by the limiting shipowner / salvor, naming at least one Defendant.
The Limitation Claim Form and a Declaration in support must then be served on all the named Defendants, who have 28 days to either admit the right of the shipowner to limit liability or file a Defence to the limitation claim.
If all the named Defendants admit the right of the shipowner to limit liability, the shipowner may then apply for a General Limitation Decree and (if so required) the constitution of a limitation fund.
The General Limitation Decree will include provision for the publishing of the decree and set a period for prospective claimants to file claims against the limitation fund.
If there is a dispute over the shipowners right to limit, then that will be referred to the Court for determination.
What is the effect of constituting a limitation fund?
Article 13 of the LLMC provides that where a limitation fund has been constituted, any person having made a claim against the fund is barred from exercising any right against any other assets of the limiting shipowner.
In The ICL Vikraman, the Court explained:
“The purpose of article 13 is thus to protect the person who has properly constituted a limitation fund in any State Party from the enforcement of a claim in respect of the same occurrence against his ships, his property or such security as he may have given which are subject to the jurisdiction of the same or any other State Party or parties”.
Therefore, the effect is to prohibit any person who has “made a claim against the fund” established in one State Party from taking enforcement against the shipowner’s assets in another State Party.
Difficult questions could arise if a person asserting a claim against a shipowner does not make the claim against the limitation fund, since on a literal view of Article 13 the prohibition on taking enforcement action against other assets would not apply. Difficult questions could also arise if a party with a claim tries to enforce against assets of a shipowner which are not located in a State Party.
Where the shipowner has already given security, the shipowner may also apply under Article 13(2) for the release of the security given in another State Party.