Chapter 8

Limitation Claims

Introduction

8.1 The concept of limitation of liability is simple. It is that a shipowner or some other person connected to the operation of a ship (such as a charterer or manager¹) is entitled to limit his liability in respect of certain maritime claims arising out of an occurrence to a particular amount, irrespective of the total amount of such claims. The rationale usually cited in English case law and commentaries for the right to limit liability is the public policy in encouraging shipping and trade.² This is said to override the competing public policy in compensating the victims of wrongdoing in full. So, for example, Lord Denning MR in The “Bramley Moore”³ said⁴:

8.2 The origin of limitation of liability is obscure.⁵ Although the privilege of limited liability had established itself in the laws in all maritime nations (in one form or other) well before the first of the attempts to regulate it by means of an international convention in 1924,⁶ it was probably not a concept derived from the general maritime law. Certainly, prior to the various statutes⁷ which gradually introduced the concept of limitation into English law no such privilege for shipowners was recognised in England either at common law or in the Admiralty Court.⁸ Thus according to Dr Lushington⁹:

8.3 Dr Lushington’s view of the position under ancient maritime law accords with the earlier views of Lord Stowell¹⁰ and the medieval codes such as the laws of Oleron¹¹ and Consolato del Mare.¹² Whatever the origin of the concept of limitation of liability, it became established first on the Continent,¹³ particularly in Holland.¹⁴ The reason why the history of limitation remains more than simply of legal historical importance is because the three international conventions of the twentieth century are based on a compromise¹⁵ between three competing systems amongst maritime nations in existence at the end of the nineteenth century.

8.4 The first European statute to expressly permit a shipowner to limit his liability for claims arising from the acts or omissions of the master to the value of the vessel and equipment was the Swedish Maritime Code of 1667.¹⁶ The procedure by which liability was limited was by service of a notice of abandonment of the vessel. In 1681 a similar provision was introduced into French law providing for limitation by abandonment.¹⁷ The principle of limiting liability by abandonment spread to Spain, Italy, Greece, Turkey, Egypt, Portugal, Romania and Japan. It was also transplanted to all of the countries of Latin America with the exception of Panama. Limitation by abandonment was not universally adopted in continental Europe. In Germany at least from 1861 onwards a different system of limitation existed. Instead of serving a notice of abandonment, the liability of the shipowner was limited at the stage of enforcement to the value of the ship plus (gross) freight.¹⁸ This German system, usually called the “execution system”¹⁹ spread north to Scandinavia and to Panama when it declared its independence in 1917). Turkey switched from the notice of abandonment principle to the execution system in 1929. The German “execution system” is based on the notion of direct liability of the ship to the creditor.²⁰

The development of limitation in English law

8.5 The development of limitation for the benefit of shipowners under English law occurred by means of a series of ad hoc reactive legislative measures. The end result of piece-meal statutory intervention over the course of 150 years between 1733²¹ and 1894²² was a statutory limitation defence based on a notional sum calculated by reference to the size (gross tonnage) of a ship combined with a procedure by which a “limitation fund” could be established to satisfy claims and protect the vessel from arrest. This limitation system was exported throughout the British Empire and by a triumph of international diplomacy became the basis of the International Convention of 1957.

8.6 The earliest English statute was the Responsibility of Shipowners Act of 1733.²³ This statute was passed in response to a petition presented to Parliament complaining about the result of the decision in Boucher v Lawson.²⁴ In Boucher v Lawson a shipowner was held liable in full to the shipper for a cargo of gold bullion stolen by the master of his ship.²⁵ The resulting petition contrasted the position of English shipowners with owners on the Continent. The Preamble to that Act stated:

8.7 The 1733 Act allowed the shipowner to limit to the value of the ship and freight for claims arising out of the theft of cargo by the master or crew. Subsequent British Acts extended the application of the principle, and introduced the idea of a notional value of the ship to replace her actual value, based upon the size (tonnage) of the ship.

8.8 The first change to the Act was that in 1786²⁶ limitation was extended to “any act, matter or thing or damage or forfeiture done or occasioned or incurred … without the privity or knowledge of the owners”. In 1813 the privilege was applied to collision cases.²⁷ At this time the right to limit applied only to British-owned vessels. Two significant changes were made in 1854.²⁸ The privilege of limitation was extended to foreign vessels. Secondly, a provision was added that in the case of loss of life or personal injury the value of the ship should be taken as not less than 15l. per ton.²⁹ In 1862, a limit of 8l. was established for damage to property. The aggregate of all claims would in no case be permitted to exceed 15l. per ton so it was always possible for owners of an arrested vessel to pay a sum into Court representing their maximum potential liability, together with interest and costs.³⁰

8.9 In 1894, the various limitation statutes were consolidated in the Merchant Shipping Act 1894 ss. 503 and 504.³¹ Finally, in 1900³² the right to limit was extended to all cases where, without fault or privity of the person seeking to limit, loss or damage had been caused to property or right of any kind whether on land or on water or whether fixed or moveable.

8.10 Thus over the course of 167 years between 1733 and 1900, English law moved from a position where it provided only a very narrow statutory limitation defence which protected English shipowners from liability for theft by master and crew based on the actual value of the ship to a comprehensive limitation defence for virtually all types of claim howsoever arising (with the exception of acts to which the owners were themselves privy) for shipowners of all nationalities based on notional per ton figures.

8.11 One oddity of the English system of limitation was that it was not overseen and regulated by the Admiralty Court. Prior to the creation of a unitary High Court of Justice in 1873, the court primarily responsible for dealing with actions seeking to limit was the Court of Chancery.³³ Furthermore, it was the Court of Chancery which oversaw the distribution of any money paid into Court by a shipowner in order to obtain release of a vessel from an arrest order issued by the Admiralty Court.³⁴

The search for international uniformity: the international Conventions of 1924, 1957 and 1976

8.12 Given that by the turn of the 20th century there were three different but widespread systems of limitation in operation in the world,³⁵ it is unsurprising that the CMI should have focused on it as an area suitable for regulation in an international convention.³⁶

8.13 The first attempt in 1924 was not a great success. It entered into force on 2 June 1931 but it was only ratified by 15 countries.³⁷ However, the 1924 Convention did at least establish the English law system as contained in s. 503 of the Merchant Shipping Act 1894 as the basic model for the two subsequent international conventions.³⁸ The delegates to the subsequent conferences on the topic held in 1957 and 1976 did not start with a blank piece of paper. On each occasion they took as their starting point the consensus reached on the last occasion and discussed how the existing convention terms could be beneficially modified.

8.14 The 1957 conference held in Brussels led to a new convention which achieved a far greater degree of international acceptance than the 1924 Convention. The 1957 Convention was ratified or acceded to by 46 countries and came into force in 1968. It still applies in 29 countries.³⁹ One of the key developments in the 1957 Convention was the expansion of the persons entitled to claim the benefit of the limitation defence beyond ship owners to charterers, managers and operators of vessels.⁴⁰

8.15 Despite the success of the 1957 Convention in gaining a substantial degree of international support, the CMI sponsored a further conference in 1976 which took place in London. It resulted in a new convention, the 1976 Limitation Convention—sometimes referred to as the “London Convention”.

8.16 The main changes in the 1976 Convention as compared to the 1957 Convention are

• Higher limits of liability
  
• The adoption of a new standard of fault (based on subjective recklessness) as the threshold for breaking the new higher monetary limits⁴¹
  
• A reversal of the burden of proof in relation to breaking limits
  
• The adoption of the universal “standard drawing right” as the means to calculate the limits.

8.17 To date, the 1976 Convention has been ratified or acceded to by 52 states.⁴² Not all of these countries have denounced the 1957 or 1924 Conventions, which can in certain circumstances lead to an earlier convention being applied than might otherwise be expected.⁴³

8.18 A further protocol signed in London in 1996 significantly increased the limits again. This protocol came into force on 13 May 2004 following the accession of Malta.⁴⁴ To date 25 countries have contracted in to the amendments contained in the 1996 Protocol.⁴⁵

8.19 The result is that in place of three main families of limitation regimes in operation around the world in 1900 (as described above), there are now four variations on one type of limitation regime in operation, all of which are essentially based on the 1924 Convention but with significant variations:

• (1) The 1924 Convention;
  
• (2) The 1957 Convention;
  
• (3) The 1976 Convention;
  
• (4) The 1976 Convention as amended by the 1996 Protocol.

Limitation of liability under English law today

8.20 Today, limitation of liability under English Law is governed by Schedule 7 of the Merchant Shipping Act 1995, which is given force of law by section 185 of the Merchant Shipping Act 1995. Schedule 7 enacts a selection of the provisions of The 1976 Limitation Convention (as amended by the 1996 Protocol).⁴⁶ However, care must be taken when referring to Schedule 7. Although Schedule 7 incorporates most of the provisions of the 1976 Convention into English law, Schedule 7 does not reproduce the Convention in terms. This is in part because the Convention contains certain opt-in and opt-out provisions. For example, the second sentence of Article 10 of the Convention which permits contracting states to make the constitution of a fund a prerequisite to the assertion of the right to limit is not reflected in Schedule 7 because the UK government chose not to opt in to this provision. Article 15 contains another important opt-in proviso, which again, does not feature in Schedule 7. Article 15 permits contracting states to exclude the application of the Convention if the person seeking to limit is not habitually resident in the Court in which the right to limit is asserted or does not have his principal place of business in a contracting state or is not registered in such a contracting state.⁴⁷ In addition to differences arising from the exercise/non-exercise of options provided for in the Convention, Schedule 7 also widens the application of the terms of the 1976 Convention by extending its application to non-sea going vessels and to “any structure whether completed or in the course of completion, launched and intended for use in navigation as a ship or part of a ship.⁴⁸ In any particular case it is necessary therefore to have careful regard both to the terms of the Convention itself as well as to Schedule 7.⁴⁹ Schedule 7 regulates the limitation of liability for occurrences after 1 December 1986.⁵⁰

8.21 In addition limitation of liability is available in relation to oil pollution claims under the provisions of the International Convention on Civil Liability for Oil Pollution Damage 1992⁵¹ which is given effect by Chapter III of the Merchant Shipping Act 1995. This Convention is considered further below.⁵²

Nuclear damage claims

8.22 The Nuclear Installations Act 1965 provides a strict liability regime where nuclear matter⁵³ is in the course of being carried within the territorial limits of the United Kingdom, but excludes the attachment of a lien or other right of action in rem against the ship and excludes the right to limit liability under the Merchant Shipping Acts. The Act does however provide for its own limitation of liability.

Hazardous and noxious substances

8.23 The International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea 1996 (“H.N.S.”) which is contained in Schedule 5A⁵⁴ to the Merchant Shipping Act 1995, also provides its own limitation of liability regime.

The 1976 Convention and Schedule 7 of Merchant Shipping Act 1995

8.24 The changes made in the 1976 Convention compared with its predecessors (as set out above) have made contested limitation actions a rare occurrence. However, in order to take advantage of the Convention and to limit liability, it continues to be necessary for the party wishing to limit either to raise limitation of liability as a defence in an action brought against him by a third party, or to obtain a decree of limitation of liability in his own limitation claim. These procedural aspects will be considered in detail below, after consideration of the circumstances in which limitation of liability is available.

The juridical nature of the right to limit

8.25 The question may arise as to whether the right to limit liability is to be characterised as a substantive or as a procedural right. This question had to be considered by Clarke J in Caltex Singapore Pte and Others v B.P. Shipping Ltd.⁵⁵ In that case a collision had occurred in Singapore between the defendant’s ship, British Skill and the claimant’s jetty. The Singaporean claimants brought liability proceedings against the English shipowner in England who applied to stay those proceedings on the ground that liability proceedings ought to be brought in Singapore where it had already commenced limitation proceedings. Singapore was not a party to the 1976 Convention and applied the substantially lower 1957 Convention limits. The claimants resisted the application on the ground that if the English proceedings were stayed the claimants would be deprived of a legitimate juridical advantage, namely the difference between the amount of their full claim (which was less than the limit which they argued would be applied in England under the 1976 Convention) and the limit which would be applied in Singapore under the 1957 Convention. The defendant sought to counter that argument by arguing that the right to limit was substantive and would therefore be applicable in England as part of the lex loci delicti. Clarke J held that English law would not characterise limitation of liability as part of the substantive law of Singapore so as to be applicable to proceedings in England as the lex loci delicti, and the English court would apply the 1976 Convention as part of the lex fori.

8.26 Clarke J found the following considerations led to the conclusion that the right to limit liability is procedural in nature:

• (i) In the case of multiple claimants, the right to limit liability cannot be relied upon in an action to establish the shipowner’s liability.⁵⁶
  
• (ii) Quantification of damages (as distinguished from remoteness and heads of damage) is a procedural question governed by the lex fori and limitation merely quantifies the aggregate amount of damages payable by the shipowner.⁵⁷
  
• (iii) The right to limit liability does not qualify or attach to the claimant’s right, nor does it qualify the shipowner’s obligation. The claimant proves his claim against the shipowner in full, but the extent to which he is entitled to enforce his claim so proved is limited by the size of the fund and the number and amount of the other claims.⁵⁸
  
• (iv) The shipowner’s right to limit may be characterised as a partial immunity from the process of arrest and execution. By establishing a limitation fund the shipowner is entitled to have his other assets exonerated from arrest or execution.
  
• (v) Practical considerations require that limitation be governed by only one law and this can only be the lex fori. Multiple claimants may have causes of action governed by more than one lex causae, e.g. in the case of a collision with a jetty in a port which also causes damage to cargo on board, the jetty owner’s claim will be governed by the lex loci delicti, but the cargo owner’s claims will be subject to the proper law of the contracts of carriage. If the different leges causae had different limitation provisions, it would be almost impossible for the English court to apply them all, which it would be required to do if they were substantive.

8.27 Clarke J’s analysis was approved by Longmore J in The “Happy Fellow”⁵⁹ where he said⁶⁰:

In Longmore J’s words “a shipowner’s right to limit is not an incident or attribute of a claimant’s claim but an altogether different right to have all claims scaled down to their proportionate share of a limited fund”.⁶¹ The Clarke / Longmore analysis of limitation as a procedural matter has not met with universal acceptance in the common law world:

8.28 Longmore J’s analysis of a limitation claim was approved in the Court of Appeal as a matter of English law.⁶³

8.29 The above analysis may now require reconsideration. The assessment of damages is now no longer a procedural matter for the lex fori but is rather a matter for the lex causae. In relation to claims in tort, the lex fori rule, unequivocally confirmed by the House of Lords in Harding v Wealands [2007] 2 AC 1, has been overtaken and reversed by Article 15(c) of Regulation No. 864/2007, usually referred to as the Rome II Regulation. The Regulation became applicable in all Member States of the EU (with the exception of Denmark) on 11 January 2009.⁶⁴ For claims in contract, the assessment of damages is similarly a matter of the lex causae and not the lex fori.⁶⁵

8.30 Accordingly, one of the main planks of the reasoning of Clarke J in Caltex Singapore Pte and Others v B.P. Shipping Ltd.⁶⁶ has been removed. Clarke J’s reasoning from the complexity of applying a number of lex causae has also lost some of its force because the Court is required to apply the lex causae to the question of assessment in any event, however complicated that might be in multiple claimant cases. It would seem somewhat artificial for a Court to apply a damages cap by reference to the lex fori after having assessed the damages to which the limit applies by reference to the lex causae as required by both the Rome I and Rome II Regulations.

Limitation of Liability—the Substantive Law

8.31 As noted above, limitation of liability in the United Kingdom is now⁶⁷ governed by the provisions of sections 185–186 and Schedule 7 of the Merchant Shipping Act 1995 (“the Act”). The Act provides for both the total exclusion of liability and also for the limitation of liability. These will be considered in turn. The exclusionary provisions of section 186 are purely a product of English domestic law. They therefore apply only to vessels registered in the United Kingdom. English Law rules of statutory construction apply. By contrast, because the limitation provisions enacted into English Law by means of section 185 originate in an international treaty a different approach to interpretation is required for limitation cases.⁶⁸ However, the two sections do have structural similarities. In each case it is necessary to consider whether one is a person who is entitled to limit their liability and whether the claim is one against which the right may be invoked.

Exclusion of Liability

8.32 The Act provides for a total exclusion of all liability in certain very limited circumstances. Section 186 of the Act provides as follows:

Persons entitled to exclude their liability

8.33 Section 186 gives this right only to those concerned with a “United Kingdom ship”, that is to say the owner, charterer, manager, operator of a United Kingdom ship and the master, crew member or servant of such persons when acting in the course of their employment. A United Kingdom ship is a ship registered in the United Kingdom under Part II of the Act.⁶⁹ Crown ships are entitled to exclude their liability under this section.⁷⁰

Claims in respect of which liability is excluded

“Fire on board the ship”

8.34 “Fire” includes loss or damage by smoke and by water used to extinguish the fire.⁷¹ However, mere heating which has not arrived at the stage of incandescence or ignition is not within the specific word “fire”.⁷²

8.35 The fire has to be a fire “on board the ship”, that is the ship whose owners are seeking to exclude their liability. Thus there can be no exclusion of liability where goods were destroyed by a fire on board the lighter which was carrying them to the ship, there being no fire on board the ship herself.⁷³ The property lost or damaged must also be “on board the ship” and so it is suggested that the section could not apply to goods destroyed by fire whilst on the wharf or quay waiting to be loaded, even though they were at that time in the control of the shipowner, and even if the fire itself was on board the ship. However, where goods on board the ship are heated by a fire on board the ship, but do not themselves catch fire until they have been discharged from the ship the section will apply.⁷⁴

“Gold, silver, watches, jewels or precious stones”

8.36 These words are self-explanatory.

“Theft, robbery or other dishonest conduct”

8.37 These words are self-explanatory.

“Nature and value were not at the time of shipment declared”

8.38 The declaration must be reasonably precise both as regards the nature of the goods and the value, so that it is not enough simply to state “one box containing about 248 ounces of gold dust” as such a description, although a sufficient statement of the nature of the goods is no statement at all of their value.⁷⁵

Loss of right to exclude liability

8.39 The only circumstances in which the right to exclude liability is lost is that provided for in subsection (3), being such personal act or omission as is mentioned in Article 4 of the 1976 Convention, i.e. committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result. This provision is considered further below.⁷⁶ The exclusion is not lost, simply because the ship was unseaworthy,⁷⁷ unless the unseaworthiness was legally causative of the fire and itself arose from a personal act or omission committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result. It is possible however to contract out of the protection afforded by section 186 of the Act, for example, by the terms of the bill of lading. Thus in Virginia Carolina Chemical Co v Norfolk⁷⁸ a bill of lading providing that “the shipowner was not responsible for any loss or damage to the goods received thereunder for carriage occasioned by inter alia fire and unseaworthiness, provided all reasonable means had been taken to provide against unseaworthiness” was held to preclude the shipowner from relying upon the statute. However, the mere inclusion of an exceptions clause in the bill of lading referring to “fire” is not by itself sufficient to preclude reliance upon the statute.⁷⁹

Limitation of Liability

8.40 Before considering the provisions of the Convention, it is necessary to consider two other provisions of English domestic law for limitation of liability which are outside the scope of the Convention. These are section 191 of the Act which provides for limitation of liability by harbour authorities and dock owners, and section 22 of the Pilotage Act 1987 which provides for limitation of liability in respect of pilotage services.

Harbour authorities and dock owners

8.41 Section 191 of the Act provides as follows:

Persons entitled to limit their liability

8.42 In order to rely upon this section one has to be one of the following:

• (i) The owner of a dock, which by subsection (9) includes any person or authority having the control and management of any dock. By subsection (9), “dock” shall include wet docks and basins, tidal docks and basins, locks, cuts, entrances, dry docks, graving docks, gridirons, slips, quays, wharves, piers, stages, landing places, and jetties. In The “Humorist”⁸³ it was held that a place where a barge moored along the front of a warehouse, consisting of a perpendicular wall going right down to the bed of the river, with a door in the middle of the front wall just above water level for the purpose of landing goods from craft, was a:”landing place” and so a “dock” within the meaning of the predecessor to the Act.
  
• (ii) The owner of a canal which by subsection (9) includes any person or authority having the control and management of any canal.
  
• (iii) A harbour authority, which by section 313(1) of the Act means either the person who is the statutory harbour authority⁸⁴ or, if there is no such person, “the person (if any) who is the proprietor of the harbour or who is entrusted with the function of managing, maintaining or improving the harbour”. By section 313(1) of the Act, “harbour” includes “estuaries, navigable rivers, piers, jetties and other works in or at which ships can obtain shelter or ship or unship goods or passengers”.
  
• (iv) A conservancy authority, which by section 313(1) of the Act includes “all persons entrusted with the function of conserving, maintaining or improving the navigation of a tidal water⁸⁵“.

Right to limit does not depend upon status

8.43 Subject to possessing the necessary status of being the owner of a dock, the right to limit liability under the Act depends upon the area within which the act causing the damage was done, and not upon the capacity in which such activity was being carried out, so that where a shiprepairer owns the dock where he carries out repairs, he may limit his liability in respect of liability incurred as repairers,⁸⁶ but where a dock owner does work at some other dock not owned by him and causes damage, he may not limit his liability in respect of a claim for such damage.⁸⁷

Claims in respect of which liability is limited

8.44 The claims for which limitation of liability is available under this section are claims for loss or damage caused to any vessel or vessels, or to any goods, merchandise or any other things whatsoever on board any vessel or vessels. It is not available for claims for loss of life or personal injury. The loss or damage itself does not have to have occurred within the dock, canal or harbour, provided the act which caused such loss and damage occurred there. In Mason v Uxbridge Boat Centre⁸⁸ Lloyd J said⁸⁹:

Basis of the limitation fund

8.45 The limitation fund is calculated by reference to the largest United Kingdom ship which, at the time of such loss or damage occurring, is, or within the preceding five years has been, within the area over which the authority or person discharges any function. The “area” referred to is the “area” in which the damage occurred, and so a dock owner who owns or controls other docks need not take into account larger ships which may have been in some other dock.⁹⁰ To the tonnage of the ship so ascertained, is to be applied the calculation required by Article 6 of the Convention as modified by paragraph 5 of Part II of Schedule 7 to the Act which is considered in detail below.⁹¹

Loss of right to limit liability

8.46 The circumstances in which the right is lost is identical to that under the 1976 Convention and is considered in detail below.⁹²

Pilots and pilotage authorities

8.47 Section 22 of the Pilotage Act 1987⁹³ provides for a right for pilots to limit their liability to the sum of “£1,000 and the amount of the pilotage charges in respect of the voyage during which the liability arose” —section 22(1)—and for pilotage authorities to limit their liability to the amount of “£1,000 multiplied by the number of authorised pilots employed by it at the date when the loss or damage occurs”—section 22(3).

Loss of right to limit liability

8.48 The circumstances in which the right is lost is identical to that under the 1976 Convention and is considered in detail below.⁹⁴

Shipowners and salvors

No admission of liability by invoking right to limit

8.49 It should be noted that it is expressly provided by Article 1(7) of the 1976 Convention, as enacted, that: “The act of invoking limitation of liability shall not constitute an admission of liability.”

Persons entitled to limit their liability

8.50 Article 1(1) to (6) of the 1976 Convention, as modified by Part II of Schedule 7 to the Act, sets out the persons who are entitled to limit their liability under the Convention, and provides as follows:

“Owner etc. of a ship”

8.51 It should be noted that by paragraph 12 of Part II of Schedule 7 to the Act, “ship” includes any structure (whether completed or in the course of completion) launched and intended for use in navigation as a ship or part of a ship. Furthermore, certain provisions of the Convention itself which exclude its application to aircushion vehicles⁹⁷ and floating platforms constructed for the purpose of exploring or exploiting the natural resources of the seabed or the subsoil thereof⁹⁸ do not form part of the Convention as enacted into English law, and therefore the owners of such things will be entitled to limit their liability provided that they would otherwise be categorised as “ships” under English law.⁹⁹ As regards hovercraft, the manner in which the limitation of liability provisions of the Act and the Convention apply to them is provided by the Hovercraft (Civil Liability) Order 1986.¹⁰⁰

” ‘Shipowner’ shall mean the owner, charterer, manager or operator of a ship”

8.52 It is clear from Article 1(1) and (2) that the privilege of limitation is available not only to the owner of a ship. However, the precise limits of the class of persons beyond owners who are entitled to limit has proved to be controversial. Two English Commercial Court Judges both with many years of experience of maritime law concluded in separate cases decided within 5 years of each other that charterers, managers and operators could only limit liability when the claim arose out of their operation of the vessel as a quasi owner e.g., where claims are brought against them by third parties, such as cargo interests in relation to the operation of the ship.¹⁰¹ The position under English law at the time the third edition of this work was published was thought to be clear: demise charterers were obviously within the class of persons permitted to limit their liability but voyage charterers and slot charterers were equally clearly outside the class. As it was put by Steel J:

8.53 The position of time charterers was that they might be able to limit in certain circumstances e.g. when sued by cargo interests on bills of lading issued by them.¹⁰³

8.54 The Court of Appeal saw the matter very differently. It held that there was no basis for putting any qualifying gloss on the word charterer in Article 1 of the Convention:

8.55 More recently the Court of Appeal’s general approach has been applied by the Admiralty Court in holding that slot charterers also fall within the class of persons entitled in principle to limit under the 1976 Convention.¹⁰⁶

8.56 The facts of The “CMA Djakarta” were as follows. On 10 July 1999, just off the coast of Cyprus a container of bleaching powder exploded causing a fire. At the time of the explosion the vessel was time chartered to CMA CGM and was operating as part of CMA’s liner network. The explosion caused extensive damage and the vessel was abandoned. She grounded off the Egyptian coast from where she was salved. The owners of the vessel brought three claims against the charterers by way of arbitration in London:

• (1) Repair and salvage costs
  
• (2) An indemnity claim for the owners’ general average contribution
  
• (3) An indemnity for claims brought by cargo interests against owners.

8.57 The total repair costs claimed by the owners was just over US$26 million. A London arbitration panel upheld all three claims on the basis that the shipment of the bleaching powder was a breach of the charterparty prohibition on the shipment of dangerous goods. The charterers had established a limitation fund in France (pursuant to the terms of the 1976 Convention) through the Commercial Court of Marseille. In the London arbitration, the charterers pleaded that their liability was therefore limited to the extent of that fund. The arbitration panel held that charterers were not entitled to limit their liability. The charterers appealed to the High Court under s 69 of the Arbitration Act. The appeal was rejected by Steel J on the basis that the acts and omissions by the charterers which gave rise to the damages claims were done in relation to the shipment of cargo and were therefore not done in the capacity of shipowner.¹⁰⁷ The arguments before Steel J at first instance focussed on the definition of “shipowner” in Article 1 of the 1976 Convention. However, having held that there was no implicit restriction on the scope of charterer for the purposes of Article 1, the Court of Appeal went on to consider whether the claims fell into the category of claims defined in Article 2 for which limitation was available. This is considered in detail below.¹⁰⁸ The Court of Appeal held that damage to the chartered ship was not a claim for which liability could be limited in any event. The Court went on to hold that the claim for an indemnity for salvage costs and in respect of general average were both also outside Article 2.¹⁰⁹ The result of the litigation was therefore that the only claim in respect of which charterers were in fact entitled to limit their liability was the indemnity claim for any cargo claims brought by cargo owners against the shipowners.

8.58 The decision of the Court of Appeal was the subject of an application by both Owners and Charterers for permission to appeal to the House of Lords. The application was successful but the dispute was settled on commercial terms shortly before the hearing was due to start.

8.59 The decision in The “CMA Djakarta” prompted the CMI to issue a questionnaire to its members. The responses received by the CMI¹¹⁰ were generally supportive of the English Court of Appeal’s construction of Article 1. However, the victory of the charterers in The “CMA Djakarta” was for practical purposes a pyrrhic victory. Their success on Article 1 opened the door in principle to limitation, but the Court of Appeal’s ruling on Article 2 narrowly confined the class of claims in relation to which charterers would be able to limit.

Slot charterers

8.60 The next issue which logically arose following the decision in The “CMA Djakarta” was whether a slot charterer also fell within the category of charterer for the purposes of Article 1 of the 1976 Convention. In Metvale v Monsanto International SARL (The “MSC Napoli”),¹¹¹ it was held by the Admiralty Court that they did.

8.61 The background to the decision was the break up of the MSC Napoli on the south coast of England in January 2007. The vessel was owned by Metvale Limited and time chartered to MSC. The owners established a fund in England in the sum of £14.7 million. Two German companies (Hapag Lloyd and Stinnes) had slot charter agreements with MSC and had issued bills of lading to shippers in their own name. It appears that most of the shippers had lodged claims not against Hapag Lloyd or Stinnes but against the English fund on ADM20 forms. However, Hapag-Lloyd and Stinnes wanted to cover themselves against the possibility of any proceedings being commenced in Germany.¹¹² The application was not contested by any other party.

NVOCCs

8.62 The conclusion reached by Teare J that slot charterers may in principle limit their liability under the 1976 Convention has not (to date) proved controversial.¹¹³ It seems likely the judgment in The “MSC Napoli” is as far as an English Court would be prepared to go in widening the class of persons entitled to limit. Non-vessel owning common carriers (NVOCCs) who often issue their own bills of lading would it is suggested not be entitled to limit liability under the 1976 Convention unless they could show that they were slot charterers too.¹¹⁴ The other question raised in The “MSC Napoli” (but not answered) is whether a shipowner who has constituted a fund is entitled to a contribution or restitution from other persons who take the benefit of the fund.¹¹⁵

“Salvor”

8.63 A salvor is broadly defined as a person rendering services in direct connection with salvage operations, including the “removal, destruction or the rendering harmless of the cargo of the ship”¹¹⁶ and “measures taken in order to avert or minimise loss … “.¹¹⁷

Persons for whom shipowners and salvors are responsible

8.64 “Any person for whose act, neglect or default the shipowner or salvor is responsible” is also entitled to limit his liability by Article 1(4). It is not therefore possible to evade limitation of liability by claiming against the employees of shipowners and salvors. It is suggested that in considering what persons are covered by this provision, it is necessary to start with the shipowner or salvor. If a claim can be brought against the shipowner or salvor for the act, neglect or default of the person concerned, then that person will be entitled to limit his liability if sued directly. If on the other hand, no claim could be brought against the shipowner or salvor, a claim brought against the person concerned will not be one against which he will be entitled to limit his liability. His right to limit liability is parasitic on the shipowner or salvor’s right.

“Insurer of liability”

8.65 By Article 1(6) of the Convention, an insurer of liability of claims subject to limitation is entitled to limit to the same extent as his assured. Thus it is not possible to evade limitation of liability by bringing a direct action against a liability insurer. The only direct action which may be brought against a liability insurer in England is under the Third Party (Rights Against Insurers) Act 1930 the material provisions of which are as follows:

8.66 In an action brought under this Act, the third party stands in no better position than the insured, and “In a case where the insurer would have had a good defence to a claim by the insured before the statutory transfer of his rights to the third party, the insurer will have precisely the same good defence to a claim made by the third party after such transfer”.¹¹⁸ Where the assured was not entitled to limit his liability by reason of his personal act or omission, committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result, an insurer will very often have a defence to the claim by the assured (and hence a defence to the claim by the creditor) according to the terms of the policy, or under section 55(2) of the Marine Insurance Act 1906. The effect of Article 1(6) of the Convention in this context would therefore appear to be that the insurer being sued under the 1930 Act could plead limitation of liability where this was applicable and had not been raised by the assured.

The whole of the 1930 Act is set to be repealed and replaced by the Third Parties (Rights against Insurers) Act 2010. The Act received Royal Assent on 25 March 2010. A commencement date yet to be appointed.

Claims in respect of which liability is limited

8.67 The Convention as enacted, specifies in Article 2 the broad categories of claims in respect of which limitation of liability is available, and then in Article 3 expressly excludes particular claims.

Article 2 provides as follows:

8.68 Article 3 of the Convention as enacted in the United Kingdom provides as follows:

8.69 In addition when the protocol comes into force Paragraph 4(1) of Part II of Schedule 7 to the Act (as amended¹²⁵) provides:

“Whatever the basis of liability”

8.70 It is no longer the case that only a claim for damages may be the subject of limitation. Limitation of liability applies “whatever the basis of liability” and “even if brought by way of recourse or for indemnity under a contract or otherwise”. Thus limitation is now available whether the claim sounds in debt or damages and whether based in tort, contract, breach of statutory duty, nuisance or strict liability.¹²⁷

8.71 The phrase “whatever the basis of the liability may be” requires the court when considering whether a claim is within Article 2 “to look at the nature of the claim rather than its legal basis” ¹²⁸ because “that language enforces concentration on the nature of the claim for financial relief and away from the legal basis of that claim”.¹²⁹

“Loss resulting from infringement of rights”

8.72 Limitation of liability is also available against claims for loss arising from the infringement of rights, other than contractual rights. Thus, where by reason of some occurrence some property right is infringed causing loss, limitation of liability can be invoked. For example, a ship could damage or destroy a pier or a wharf and affect the business operations being carried on there. If the business operators simply had a contractual right of user then presumably their claims would not be subject to limitation of liability. However, the shipowner or salvor would not be liable in the first place, such loss being too remote. If on the other hand, they had some proprietary right such as an easement which was infringed or a statutory or customary right, then limitation of liability could be invoked. Other examples could be a claim for public nuisance brought by users of a navigable river blocked as a result of some occurrence, or the destruction of a bridge by a ship which could give rise to claims in public nuisance for interference with a highway or the statutory rights of a railway company over the bridge. In The “Aegean Sea”¹³⁰ it was held that a claim for freight lost as a result of the loss of the ship was a claim for the infringement of contractual rights and thus not within Article 2(1)(c).

No limitation against claims for salvage and general average

8.73 A shipowner is not entitled to limit his liability in respect of a claim for salvage made against him by a salvor, nor against a claim for a general average contribution. Where however, in a cargo claim the cargo owners claim an indemnity in respect of salvage and general average contributions, the shipowner will be able to limit his liability against such claims.¹³¹

Limitation of liability and counterclaims

8.74 It may often be the case that an incident gives rise to cross-claims, the classic example being a collision where both ships are to blame and both ships are damaged. In such circumstances, the question arises as to whether one first applies limitation of liability so that each party claims the other’s limitation fund, or whether limitation of liability is applied only to the balance after setting off one claim against the other. This is dealt with by Article 5 of the Convention which provides as follows:

In the case of a collision, this is the same solution as has been the case in English law since the decision of the House of Lords in The “Khedive”.¹³²

8.75 A more difficult problem however arises in the case of a counterclaim by a shipowner in respect of negligence in the performance of salvage services.¹³³ Does Article 5 apply in such a case so as to require set off of the salvage reward and the claim for damages before applying limitation of liability? It is suggested that the answer to this question is that Article 5 is not applicable to such circumstances for the simple reason that Article 5 is directed at dealing with two claims which are both the subject of limitation of liability. Article 5 refers to applying limitation to the balance of the claims. This makes sense where both claims are claims in respect of which limitation of liability may be claimed, but makes little sense where the balance may be a claim against which limitation of liability is not applicable. Thus upon the true construction of the Convention, Article 5 applies only to claims falling within Article 2 because it is only in such circumstances that one needs to strike any balance in order to determine which party may be entitled to limit his liability.

8.76 It has been suggested¹³⁴ that Article 5 may not be applicable in such a case as the two claims do not arise “out of the same occurrence”. However this argument requires an unnecessarily restricted meaning of “occurrence”, and where salvage services are performed negligently, the “occurrence” which gives rise to both the claim for salvage and the claim for damages is the performance of the services.

Loss of Right to Limit Liability

Contracting out of limitation

8.77 It is possible to lose the right to limit liability by contract. Thus in The “Satanita”,¹³⁵ two yachts were entered by their respective owners in the Mudhook Yacht Club regatta, each owner undertaking to be bound by the club sailing rules. By the club rules, the owner of any yacht disobeying any of the rules was to be liable for “all damages arising therefrom”. The House of Lords held that upon the true construction of the rules the words “all damages” excluded the operation of limitation of liability under statute.

Conduct barring limitation

8.78 Article 4 of the Convention provides as follows:

“Personal act or omission”

8.79 The shipowner, salvor will only be barred from limiting liability where he is personally at fault in the manner specified in Article 4. In other words if the loss has resulted from the intentional or reckless conduct of his servants or agents for whom he is vicariously responsible, he will be entitled to limit his liability¹³⁶ (although the person concerned would not be if sued directly). If however the conduct is that of the shipowner or salvor personally, he will not be entitled to limit liability. In the case of individuals the operation of this provision is relatively straightforward. In the case of a corporate body, it is more difficult to ascertain when that body has been personally at fault. Probably the best examination of this issue is to be found in the speech of Lord Reid in Tesco Supermarkets v Nattrass¹³⁷ where he said¹³⁸: