Gaps in the Limitation Regime

Whilst the adoption of the 1976 Limitation Convention has brought much clarity to the implementation of limitation rights, it is not a complete code and there are a number of important issues that are not regulated by the Convention and which are left to be determined by the lex loci of the place where the fund is constituted. Article 14: Governing Law, of the Convention specifies that:

“Subject to the provisions of this Chapter the rules relating to the constitution and the distribution of a limitation fund, and all rules of procedure in connection therewith, shall be governed by the law of the State Party in which the fund is constituted”.

In the recent case of As Fortuna Opco BV and another v Sea Consortium Pte Ltd and Others[1] the Singapore High Court has given helpful guidance in relation to two such issues.

The Supreme Court Building, Singapore (where CA and HC cases are heard)
  1. Limitation fund interest

Article 11 of the Convention specifies that a limitation fund should include interest “from the date of the occurrence giving rise to liability until the date of the constitution of the fund” but makes no provision for subsequent interest. This is, presumably, since the fund has traditionally been established by way of deposit and it was assumed that the fund would continue to earn its own interest thereafter in accordance with the law of the country of deposit. However, this assumption has been undermined by the fact that the courts of (at least some) countries[2] are now prepared to allow a limitation fund to be established by the provision of security in the form of a guarantee or P & I letter of undertaking (LOU) if satisfied of the sufficiency of that security[3]. In such circumstances, a fund constituted by a LOU would not automatically earn interest during the period of its currency.

In the As Fortuna Opco case the parties agreed that:

  • the LOU should include interest from the date of the incident to the date of the constitution of the fund at the same rate as that which would have applied if the fund had been constituted by payment into court; and that
  • provision ought to be made for post-constitution interest where a limitation fund is constituted by way of a guarantee or LOU.

The Convention itself does not specify what rate of interest should apply to the constitution of the fund. Accordingly, the rate is to be determined pursuant to Article 14 in accordance with the law of the place where the fund is constituted. In the case of the UK the relevant rate is that specified by the Secretary of State in the Merchant Shipping (Liability of Shipowners and Others (New Rate of Interest) Order 2004. i.e. one per cent more than the base rate quoted from time to time by the Bank of England. Since there was no equivalent legislation in force in Singapore, the Singapore court held that the pre-constitution interest rate should be that which corresponded to the statutory interest rate on judgement debts in Singapore, namely 5.33%.

However, the parties disagreed regarding the rate of post-constitution interest. The ship owners argued that the rate should approximate that which would actually be earned by a payment into court, which they considered to be 2%. However, the cargo interests argued that a fair interest rate should be that which applied to the pre-constitution period (i.e. 5.33%) since by not making a payment into court, the ship owners would gain an advantage by their ability to benefit from the higher interest rate that the money could probably earn on deposit in the open market.

In determining this issue the court was guided by the fact that article 11.2 of the Convention provides that the guarantee or LOU should be “acceptable under the legislation of the State Party where the fund is constituted and considered to be adequate by the Court or other competent authority” . In considering what is “acceptable” and/or “adequate” the judge held that:

“…it should place the claimants in a position no worse than if the limitation fund had been constituted by payment into court. I therefore considered that an LOU ought to make provision for post-constitution interest at a rate which approximates the interest which could be earned on a limitation fund paid into court during the period that the fund remains in court.”

The court also opined that since the ship owners were entitled under the Convention to establish a limitation fund by the provision of a guarantee or LOU rather than by a payment into court, the court’s role was to ensure that the claimants against the fund should not be in a worse position in such circumstances. However, provided they were not put in a worse position, there was no reason why the court should restrict any benefit that the ship owners might incur as a result of proceeding in this manner. Consequently, having made enquiry as to the rate of interest earned previously on moneys paid into court pursuant to other types of proceedings, held that the appropriate post- constitution interest rate should be 2.5%.

  • Limitation proceedings Costs

The fundamental principles relating to the allocation of costs in a limitation action brought under the 1976 Convention were described by Clarke J in the “Captain San Luis”[4] At pages 578-9 of the judgement the judge emphasised the difference that has been brought by Article 4 of the 1076 Convention as follows:

“There is a radical difference between the case where the shipowner must prove that the damage occurred without his actual fault or privity before he is entitled to a decree and the case where the shipowner is entitled to a decree unless the claimant proves either that he intended to causethe loss or that he acted recklessly and with knowledge that damage would probably result.”[5]

He then went on to conclude:

“a fair balance is struck between the parties if it is held that the shipowner must pay the costs of proving those matters which he must prove in order to obtain a decree and that the claimant must pay the costs of investigating and determining the facts which the Convention provides that he must prove if, at the end of the day, he fails to establish those facts.

However, the Captain San Luis was a case in which the shipowner’s right to limit was contested and in the As Fortuna Opco case the Singapore High Court considered allocation of costs in a case in which the right to limit was uncontested. Having distinguished the Captain San Luis on this ground he court made the following detailed order:

36 “In the light of the foregoing discussion, the following principles should apply to costs of uncontested limitation decrees:

(a) The shipowner should pay the claimants’ costs in relation to those matters for which the burden of proof lies on the shipowner. These would include establishing the shipowner’s prima facie right to limit liability pursuant to Arts 1, 2 and 3 of the 1976 Convention and determining the limitation amount pursuant to Arts 6 and 7 of the 1976 Convention. Where an LOU is used to constitute the limitation fund, it will also include establishing the LOU’s adequacy and acceptability.

(b) In respect of matters for which the burden of proof lies on the claimant (eg, facts required to break limitation pursuant to Art 4 of the 1976 Convention), while the claimant is entitled to seek and be given such information as to enable it to decide whether or not to dispute the shipowner’s right to limit its liability, each party should bear its own costs in this regard.

(c) Where an application for discovery is made pursuant to O 70 r 37(6), the costs of such discovery application should follow the event.

(d) The foregoing principles are subject always to costs being in the discretion of the court.

37 For the foregoing reasons, I ordered the Plaintiffs to pay the Defendants’ costs in relation to:(a) the establishment of the Plaintiffs’ prima facie right to limit liability pursuant to Arts 1, 2and 3 of the 1976 Convention;(b) the calculation of the size of the limitation fund; and(c) the consideration of the adequacy and acceptability of the draft LOU”

Such clarification is sensible and welcomed albeit that there may still inevitably be cases in which the demarcation line between the various heads of costs will be blurred.

The Captain San Luis
  • The cost of providing the fund

A more complex problem which was not considered in the As Fortuna Opco case arises in relation to the cost of establishing a limitation fund particularly where that fund has to be established in the form of a cash deposit or guarantee.

Article 11 of the Convention provides that:

“Any person alleged to be liable may constitute a fund”

and that

“A fund constituted by one of the persons (that are entitled to limit pursuant to Article 1) or his insurer shall be deemed constituted by all (such) persons…

In most cases the fund will be established by the shipowner since that is the “person” that is most vulnerable to arrest. However, once established, the fund will be available to protect the interest of any of the other “persons” that are entitled to limit pursuant to Article 1. For example, cargo claims may be brought against both ship owners and charterers and charterers may wish to limit their liability by relying on a limitation fund that has been constituted by the ship owners.

David Steel J, observed at first instance in the “CMA Djakarta”[6] that whilst the Convention provides expressly that the limitation fund would protect the “common exposure” of the various parties that were defined under the rubric of “shipowner”:

no provision is made for allocation of the cost of putting up the fund among the members of the class.”

and again at para 60:

“Not only are questions of responsibility for supplying funds outside the convention…”

Therefore, how is the cost of providing and subsequently administering the fund to be allocated if it is proved in due course that parties other than the “person” that has constituted the fund seek to take advantage of the fund either wholly or partly in order to limit their liability? Since the Convention does not regulate this issue it is presumably to be determined pursuant to article 10 in accordance with the law of the forum, and the answer to the problem may, therefore, differ depending on what that law provides.

If the issue were to be determined in accordance with the law of England and Wales it may be that the most fruitful avenue to follow is the law relating to unjust enrichment. In a nutshell, there is unjust enrichment when one person acquires a benefit at the expense of another in circumstances which are unjust and is required to make restitution to the person that has provided the benefit.

In the case of Benedetti v Sawiris[7] the Supreme Court held that four factors must usually be established in order to establish a case of unjust enrichment, namely:

  1. the defendant has been enriched; and
  2. this enrichment is at the claimant’s expense; and
  3. this enrichment at the claimant’s expense is unjust; and
  4. there is no applicable bar or defence.

The provision of a limitation Fund that is intended to protect the interests of “persons” other than those of the ship owners is likely to satisfy requirements 1 and 2. However, requirements 3 and 4 may be more difficult to justify.  On the one hand, it was held in Owen v Tate[8] and McDonald v Coys of Kensington (Sales) Ltd[9] that the person that has benefitted need not have specifically requested the benefit and it is sufficient that he has freely accepted the benefit.

However, it may be argued that by electing to establish a limitation fund, the ship owners do so fully appreciating and accepting that such a fund will automatically benefit not only them but also all the other “persons” identified in articles 9 and 11.3 of the Convention and that, consequently, although there is enrichment of such “persons”, there is no ”unjust” enrichment. Or, to make the same point differently, it cannot be said that the enrichment is “unjustified” if it is simply a voluntary bestowal of a benefit.

Nevertheless, it is noteworthy in this regard that Scarman LJ said the following in Owen v Tate:

“The fundamental question is whether in the circumstances it was reasonably necessary in the interests of the volunteer or the person for whom the payment was made, or both, that the payment should be made – whether in the circumstances it was “just and reasonable” that a right of reimbursement should arise.”

The underlined words would seem to suggest that there is a case for unjust enrichment even if the relevant voluntary act benefits the volunteer as well as the receiver of the benefit.

The concept that since there is a “common exposure” and a “common interest” of all “persons” that are entitled to limit, such “persons” should share the cost of providing the fund  was emphasised by David Steel J at first instance in the “CMA Djakarta”[10]:

“These provisions are only consistent with all those identified as within the class of shipowner having a common potential exposure to the relevant claims and a common interest in funding the limit of liability,…”

 Furthermore, given the references to, the “just result” and the “fair balance” for allocating costs that was adopted in the “Captain San Luis”, it would appear that a creditable argument could be raised to satisfy criteria numbers 3 and 4.


[1] (2020) SGHC 72

[2] The Court of Appeal of |England and Wales recognised the sufficiency of a limitation fund established  by a P and I letter of undertaking in the case of the “Atlantic Confidence”

[3] For a more detailed commentary see Chapter 10 entitled “Limitation of Liability: Recent important developments in the United Kingdom other common law jurisdictions” of Maritime Liabilities in a Global and Regional Context, Informa 2019

[4] (1993) 2 Lloyd’s Rep 573.

[5] (1993) 2 Lloyd’s Rep 573 at 578-9

[6] (2003) 2 Lloyd’s Rep. 50

[7] (2014) AC 938

[8] (1976) QB 402

[9] (2004) EWCA Civ 47

[10] At paragraph 45

Independent Contractors Facing Unlimited Liability!

JD Irving Ltd v. Siemens Canada Ltd (The SPM 125) 2016 FC 287 (Federal Court of Canada)

 The shipowners, JDI, engaged a firm of marine consultants to prepare stability calculations in respect of the loading of a cargo of large industrial equipment on and off the barge SPM125. During the loading process, the cargo was damaged and the owner of the cargo brought an action against the carrier claiming damages (CAD$45,000,000). The cargo owner also brought an action against the firm of marine consultants and the naval architect (who was the principal of that firm and had carried out the calculations) for the same amount.

The question that arose in this case was whether the firm of consultants had a right to limit their liability under the Convention on Limitation of Liability for Maritime Claims 1976, as amended by the Protocol of 1996, which has been incorporated into Canadian law by Part 3 of the Marine Liability Act.

Article 1(4) of the Convention stipulates:

If any claims set out in Article 2 are made against any person for whose act, neglect or default the shipowner or salvor is responsible, such person shall be entitled to avail himself of the limitation of liability provided for in this Convention.

There is no firm judicial reasoning on this point and differing opinions have been expressed in text books. The Court has subscribed to the view that Article 1(4) would afford limitation to a person if the shipowner or salvor has vicarious liability for the actions of that person. This would be the case when the negligence of a master or crew member gives rise to a claim by a third party against the owner or salvor. The crew or master in that case would accordingly have a right to limit their liability under the Convention. However, the relationship between an employer and an independent contractor would not usually give rise to a claim for vicarious liability and on that basis, such contractors are not afforded a right to limit their liability under Article 1(4) of the Convention. Applying this reasoning, it was held that the marine consultants in the present case could not enjoy the right of limitation.

The decision is a significant one as it adopts a new yardstick in determining whose actions a shipowner and/or salvor is responsible for in the context of the application of Article 1(4) of the Limitation Convention 1976 as amended by 1996 Protocol. The relevant party is able to limit its liability if the shipowner and/or salvor has vicarious liability for the actions of that party. Apart from marine consultants, classification societies, freight forwarders and logistics experts are likely to fall under this category. The judgment is not binding on English courts but obviously its reasoning needs to be considered carefully when the issue does arise, in addition, it sends a strong warning to the liability insurers of independent contractors as lack of the prospect of limitation would mean a huge increase in the exposure that they might face!

 

Breaking the unbreakable. Owners’ limitation claim scuttled.

 

Under article 4 of the 1976 LLMC the right to limit is lost if the party challenging limitation can prove that the loss resulted from his personal act or omission, committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result. This is an extremely high hurdle to surmount and the right to limit has been regarded as virtually unbreakable – until now.

 

In The Atlantik Confidence Kairos Shipping Ltd & Anor v Enka & Co LLC & Ors [2016] EWHC 2412 (Admlty) (11 October 2016) Teare J. held that the right to limit was lost in circumstances where the cargo was lost following a decision by the owners to scuttle the vessel. Cargo had managed to establish that the vessel was lost due to a deliberate starting of a fire by the master and chief engineer upon the instructions of the  alter ego of the Owners, Mr. Ahmet Ali Agaoglu, the sole shareholder and director. Teare J. concluded: “In those circumstances the loss of the cargo resulted from his personal act committed with the intent to cause such loss. The loss of the cargo was the natural consequence of his act as he must have appreciated. There can be no doubt that he intended the cargo to be lost just as much as he intended the vessel to be lost.”

The EU Referendum. Part Three. Losing our Directives?

 Since 2000 the EU has become increasingly active in the maritime sphere as regards safety and the environment. This has led to a series of Directives, set out below, which will cease to have effect under the implementing statutory instruments in the UK on repeal of the European Communities Act 1972.

First off, there is the series of Directives generated under the third maritime safety package, known as ERIKA III, which entered into force on 17th June 2009.

–  Directive 2009/21/EC on compliance with flag state requirements

– Directive 2009/15/EC and Regulation (EC) No. 391/2009 on common rules and standards for ship inspections and survey organisations

–  Directive 2009/16/EC on port State control

– Directive 2009/17/EC establishing a Community vessel traffic monitoring and information system

– Directive 2009/18/EC establishing the fundamental principles governing the investigation of accidents in the maritime transport sector

– Directive 2009/20/EC on the insurance of shipowners for maritime claims

This gives Member States the power to expel from their ports vessels which do not have a certificate showing liability for maritime claims up to the limits in the 1976 LLMC as amended by the 1996 Protocol.

Erika III also produced a Regulation.

Regulation (EC) No. 392/2009 on the liability of carriers of passengers by sea in the event of accidents. This brought the 2002 Protocol to the Athens Convention into force within the EU in 2012. The UK has ratified the Protocol and on 28 May 2014 brought it into domestic law through a statutory instrument The Merchant Shipping (Convention Relating to the Carriage of Passengers and their Luggage by Sea) Order 2014 deriving from the powers conferred by sections 183(4) and (6) and 184(1) and (3) of the Merchant Shipping Act 1995

 Other notable Directives in the maritime sphere are

Directive 2005/35/EC of the European Parliament and of the Council of 7 September 2005 on shipsource pollution and on the introduction of penalties for infringements

This criminalises ship source pollution in cases of ‘serious negligence’ and was the subject of a decision of the ECJ in 2008 in the Intertanko case C-308/06 in which it decided that the legality of the Directive could not be assessed in the light of either MARPOL or UNCLOS.

Directive 2012/33/ on the Sulphur Content of Maritime Fuels.

This came into effect on 1 January 2015 and requires ships sailing in the English Channel, the North Sea and the Baltic Sea (the North European emission control area) to use bunker oil with a maximum 0.1% sulphur or apply alternative methods in order to achieve the same effect.

Directive 2013/30/EU on the safety of offshore oil and gas operations and amending Directive 2004/35/EC

This was the EU response to the ‘Deepwater Horizon’ blowout in 2010. The Directive aims to prevent the occurrence of a ‘Deepwater Horizon’ in offshore installations in the EU but also addresses, in part, the response should such an incident occur, through three provisions. First, art. 38 extends the territorial scope of the Environmental Liability Directive 2004 (the ‘ELD’) from coastal waters to waters within the exclusive economic zone or the continental shelf of Member States, up to 370 km from shore. Second, art.7 requires Member States to ensure that the licensee is financially liable for the prevention and remediation of “environmental damage” – i.e. damage falling within the ELD – caused by offshore oil and gas operations carried out by, or on behalf of, the licensee or the operator. Third, art.4 requires Member States “to require the licensee to maintain sufficient capacity to meet their financial obligations resulting from liabilities for offshore oil and gas operations.” and, when granting or transferring licenses, to take due account of, inter alia, “the applicant’s financial capabilities, including any financial security, to cover liabilities potentially deriving from the offshore oil and gas operations in question including liability for potential economic damages where such liability is provided for by national law”. These provisions came into effect on 19 July 2015.

It is, of course, open for Parliament to provide for the continuation of the statutory instruments implementing these Directives.

The House of Commons Briefing Paper of 30 June suggests (p14):

There might be some over-arching legislation saying, for example, that all UK laws implementing any EU Directive were repealed (perhaps with specified exceptions); or that they would all remain in force (again perhaps with exceptions). If the ECA were repealed, any secondary legislation based on s2(2) ECA would need to be saved from lapsing if it was to continue in force. EU Regulations, which are directly applicable (i.e. they do not need further implementation in the UK to come into force) will cease to have effect if the UK were to repeal the ECA.

There is no reason why EU-based UK law could not remain part of UK law, but the Government would have to make sure it still worked without the UK being in the EU.

The Government would probably come up with a mechanism for allowing changes to be made to secondary legislation (Statutory Instruments) made under the ECA or other ‘parent’ acts. There could also be general amendments, such as replacing references to ‘the Commission’ or ‘Council’ with references to ‘the Secretary of State’.

The devolved legislatures would have to deal with EU legislation they have transposed into Scottish, Welsh or Northern Irish laws. It would also be necessary to amend the relevant parts of the devolution legislation, which might require a Legislative Consent Motion under the Sewel Convention.

The 1976 LLMC in Denmark and India.

Two recent decisions of foreign courts as to the effect of the 1976 LLMC. The first is the decision of the Danish Maritime and Commercial Court in the MOL Comfort that the constitution of a limitation fund in Japan, another state party to the 1976 LLMC, does not bar proceedings before it in relation to the loss resulting in the constitution of the fund. The legal effect of the constitution of the fund in Japan would not come into force until enforcement of the judgment is sought. In the UK Schedule 7, paragraph 8(3) of the Merchant Shipping Act 1995 gives the court power to “stay any proceedings relating to any claim arising out of that occurrence which are pending against the person by whom the fund has been constituted.”

The second is the decision in The Yuriy Arshenevskiy of the Indian High Court (LMLN 946 – 04 March 2016) that it was not a pre-condition for maintainability of a suit for constitution of a limitation fund that there should have been a prior proceeding in the Indian court against the vessel or her owner. This is the position previously reached in the English Court of Appeal in The Western Regent [2005] 2 Lloyd’s Rep 359. The court also decided that: section 352 of the Merchant Shipping Act 1958 as amended by the Amendment Act 63 of 2002 meant that the shipowner had an absolute right to limit, and; the expression “as amended from time to time” used in the definition of the “Convention” in section 352B of the Merchant Shipping Act 1958 captured all future amendments to the 1976 Convention, and accordingly the 1996 Protocols applied, although they came into effect after the 2002 Act came into force. The court also held that the shipowners were not estopped from establishing a limitation fund because they had made an earlier application to establish a fund in China which had been withdrawn.