In the field of Shipping, there is a distinct system of limitation of liability which channels the liability on the shipowner while exempting other members of the shipping industry from such liability. This concept of channeling of liability on one person reflects the fact that it is primarily the shipowner who manages and controls his ship and derives revenue from its operation. Accordingly, it is also the shipowner who shall be legally responsible for the operation of his ship. The shipowner has to make sure that the applicable Laws and International Rules and Regulations are observed carefully. Therefore, the concept of channelling the liability on the shipowner mirrors his responsibility with respect to his ship.
The intent of law is that to allow the Vessel Operators, who undertakes’ a huge risk in transporting goods and person in water, to escape unlimited liability, which can put them out of business and stifle further investments in marine commerce and shipping.
In 1734, the English Parliament passes the forerunner of modern statutes limiting shipowner’s limitation of liability under the Shipowner’s Limitation of Liability Act, 46 U.S.C. §30501 et seq. (“Limitation Act”), to the same extent as the owners of ocean-going ships.
A bareboat charterer, essentially a leaseholder who obtains possession and full control and command over a vessel, is deemed to be an Owner pro hac vice and is entitled to seek limitation of liability as per 46 U.S.C. § 30501. In order to be entitled for the protection under the Limitation Act, the Vessel must be operating within the navigable water. Courts have broadly construed the term “Vessel” to include pleasure craft such as jet skis.
As a consequence, if a workboat is involved in a maritime casualty, the workboat owners or bareboat charterer may be entitled to limit their liability to the value of the workboat after the incident, along with the towing charges, hire or freight which are still owned for the job. The limitation right can obviously be of a great benefit to a workboat’s owner and insurers when the damages from a marine casualty are substantial.
In the United States, the limit except as to the claims for personal injury and wrongful death, is the value of the vessel and the earnings on the voyages on which it was engaged at the time of such casualty.
In the United Kingdom, they have ratified the conventions of the Brussels limitation of liability convention of 1957 and have enacted the domestic legislation by embracing its terms to the limit of £28, or its equivalent, multiplied by the adjusted net tonnage of the vessel, regardless of its actual value.
Limitation of Liability of Workboats in Marine Industry
The Limitation Act is only applicable to accidents that result in personal injuries and other losses that occur on the navigable waters. A Vessel Owner is not entitled to limit liability in the event where the casualty took place on a waterway which is not considered to be navigable.
The Limitation Act merely states that, “the Owner of any Vessel, whether American or foreign” can limit its liability as per 46 U.S.C. App. §183(a). As per the ratio held in “Dick v. U.S., 671 F.2d 724, 727 (2nd Cir. 1982)” the word “Owner” to include parties other than the registered Owner of Vessels. Courts include those who exhibit some type of domination or control over the Vessel. As a general rule, one who is subjected to a Shipowner’s liability because of his exercise of dominion over a Vessel should be able to limit his liability to that of an Owner.”
- Those who are possessing a legal title to the Vessel.
- President and sole shareholder of the Vessel.
- Owner of the Vessel at the time of the casualty who have sold the Vessel at the time of the litigation.
A Vessel Owner’s limitation rights are subject to several important qualifications which have special significance in the unique circumstances of the workboat industry.
Privity or knowledge:
A Vessel Owner is entitled to limit its liability if the fault that caused the casualty is not within the Owner’s knowledge or privity. In other words, if the Owner intends to escape the unlimited liability, it is essential for the Owner to prove that he lacked the privity or knowledge of “the act or condition that caused such injury”. Various provisions of Subchapter M, generally under a TSMS (Towing Safety and Management System), essentially charge the ownership and management with knowledge and require privity in the day-to-day operations of the vessel under the TSMS.
Notwithstanding anything, in the event where the senior management of a corporate is in knowledge and is aware of the fault that caused the causality, then in such circumstances it shall be presumed that the fault is deemed to be within the owner’s privity and knowledge.
Therefore, it is clear that the shipowner liability is limited for the negligence of his master or crew, but not for his own personal negligence or that of his managerial personnel.
In the workboat Industry, due to the closer involvement of the management in the daily operation of the fleet and due to sheer proximity of the Vessels to the management control it becomes difficult to predict whether the knowledge of an individual will be imputed on the Vessels’ Corporate Owner and in such scenario, the questions vis-à-vis the ‘knowledge or privity’ is only determined on a case-to-case basis.
In the event of casualties arising due to the negligent act of the workboats Master or Crew generally will not be considered within the Owner’s knowledge and the Owner of the workboat will be entitled to limit its liability. If any casualties were notified to the Owner as it was happening and if the Owner is involved in the decision-making process leading to the happening of such casualties, then the Owner shall not be exempted neither will the Owner be able to limit his liability.
Clause protecting the liability of the Owner
Limitation of Liability of Workboats in Marine Industry
A workboat Owner can attempt to limit his liability contractually by inserting a clause in an Agreement envisaging that the owner’s liability is restricted upon a certain monetary amount. As long as the monetary amount for liability is limited and the same is not punitive and bears a reasonable relationship to the transaction, the said clause in the agreement can be enforceable on the courts.
The Limitation Fund:
The limitation fund is the amount to which a Vessel Owner may limit its liability. The Limitation Fund is having a special significance on the workboat industry as the same relates to the calculation of limitation fund. In normal cases, only one Vessel is involved and as such the limitation fund is calculated by taking into account the value of the Vessel and the amount of fright at the time of the casualty. The law historically analyses that the calculation of the limitation fund is based on whether the claims involved are for ‘tort’ or for ‘breach of Contract’.
The Limitation Fund contemplates that the shipowner should deposit in the court, for the benefit of all the Claimants, a sum equal to the amount or value of the Owner’s interest in the Vessel and pending freight, or approved security, and in addition to such sums as the court may from time to time fix as necessary to carry out the provisions of the statutes as amended;
Third Party claim based in tort: If the claim is brought by any third party for negligence/tort against the owner and in the absence of any contractual agreement, the limitation fund is calculated based on the value of the Vessel at the time of such fault.
Claim based on breach of Contract: If the claim is based on a breach of contract, the limitation fund is calculated based on the number of Vessels which are based on the flotilla under the same Ownership. The value of any other property in the flotilla owned by the Company such as barges is also subject to the inclusion in the limitation fund. The limitation fund may be increased pursuant to the “flotilla doctrine”. Under the flotilla doctrine, the value of all the Vessels involved in the completion or performance of a contract must be surrendered to a limitation fund when those Vessels are: subject to common Ownership; engaged in a single enterprise; and under a single command as held in Valley Line Co. v. Ryan, 771 F.2d 366 (8th Cir. 1985); Standard Dredging Co. v. Kristiansen, 67 F.2d 548 (2nd Cir. 1933).
The Personal Contract Doctrine:
This Doctrine is also of high significance in as much as this judicially crafted exception to the Limitation of Liability Act, prohibits an Owner from limiting his liability from claims brought in under the breach of the personal contractual obligations. The theory behind this Doctrine is that as a matter of policy, a Vessel’s Corporate Owner should not be entitled to limit its liability arising out of its own personal undertakings.
This Doctrine is vague as not all contractual obligations in the shipping business are considered as personal and it is not easy to define and identify as to what all contracts should be termed as personal. Almost all Charters and Contracts of affreightment in the workboat context to the extent that they contain warranties of seaworthiness are personal obligations of the Owner and claims for breach of those obligations cannot be limited. Bills of lading are not considered as personal contracts. Towage contracts contain many personal obligations, such as the payment obligation, but not all breaches of a towage contract will be a breach of a personal obligation. Damages to the tow resulting from the negligence of a tug master, for example, may not be a breach of any personal obligation of the tug owner.
Limitation of Liability of Workboats in Marine Industry
Considering the nature of the workboat industry and the contractual nature thereof, this Doctrine can act as a major restriction on the limitation rights on the workboat Owners. However, a workboat Owner can protect himself from the application of the said Doctrine by including specific clause in the agreement stipulating that nothing in the contract is a personal obligation and that the contracting parties shall mutually agree that the respective parties are entitled to avail the benefits of the Limitation Act.
Farrell Lines, Inc vs Jones 530 F.2d 7 (5th Cir. 1796)
A vessel owner, pursuant to the Limitation Act, is entitled to limit its liability after a maritime incident or casualty to the post casualty value of the vessel and the pending freight, except when the loss occurred due to its “privity or knowledge.” 46 U.S.C. App. §183(a). In other words, privity or knowledge will be found to exist where the acts of negligence or unseaworthiness that caused the casualty were known or should have been know by the vessel owner.
Stewart v. Dutra Const. Co., 543 U.S. 481, 125 S. Ct. 1118 (2005).
The U.S Supreme Court in the said case held that the Limitation Act applies to all “seagoing Vessels, and also to all Vessels used on lakes or rivers or in inland navigation, including canal boats, barges, and lighters.
” Keys Jet Ski, Inc. v. Kays, 893 F.2d 1225 (11th Cir. 1990)
Owners of pleasure craft, including jet skis and house boats, are permitted to limit liability.
Coleman vs Jahncke Service, Inc. 5 Cir. 1965, 341 F.2d 956
In order to determine whether the shipowner is entitled to limitation employs a two-step process. First the Court must determine what acts of negligence or conditions of unseaworthiness caused the accident. Second the Court must determine whether the shipowner had knowledge or privity of those same acts of negligence or conditions of unseaworthiness. Knowledge or privity of any fact or act causing the accident is not enough for denial of limitation; it is only knowledge or privity of negligent acts or unseaworthy conditions which triggers a denial of limitation.
American Milling Co., Ltd., 409 F.3d 1005 (8th Cir. 2005).
A vessel’s manager, who employed the towboat’s crew, was not permitted to limit its liability as it did not exercise sufficient control or dominion over vessel to be considered an owner pro hac vice, for limitation of liability purposes.
Oil Spill by Amoco Cadiz, 954 F.2d 1279 (7th Cir. 1992)
Agents of owners and technical managers are not permitted to limit liability.
China Union Lines, Ltd. v. A.O. Andersen & Co., 364 F.2d 769, 787 (5th Cir.1966)
This burden is not met by simply proving a lack of actual knowledge, for privity and knowledge is established where the means of obtaining knowledge exists, or where reasonable inspection would have led to the requisite knowledge.
Buren of Proof:
Limitation of Liability of Workboats in Marine Industry
When the Limitation proceedings is initiated, there casts a unique burden on the owner and the Claimant. The Claimants are required to show that the personal injuries or loss was caused due to the negligence or vessel unseaworthiness. In other words, the Claimant must establish liability of the shipowner over him. Once this occurs, the burden of proof is then shifted to the owner to show whether the owner had knowledge or privity of those same acts of negligence or conditions of unseaworthiness. Once the claimant satisfies the initial burden of proving negligence or unseaworthiness, the burden of proof shifts to the shipowner to prove the lack of privity or knowledge.
Advantages of the Limitation Act to the Owners:
The Vessel owners have the advantage to have the claims consolidated in a single federal forum. Upon the commencing of any such proceedings, any prior proceedings (state or federal) against the vessel owner involving the same incident are stayed pending the outcome of the limitation proceedings. The Courts order require all the Claimants to litigate their claims arising out of the casualty to be filed and determined in a single proceeding by the limitation court.
Purpose for consolidating Claims:
The purpose is to provide for a marshalling of assets and for setting of priorities among claims where the asserted claims exceed the value of the vessel and its freight. Where the limitation fund is not sufficient to pay all potential claims, however, a concursus is alleged to be necessary because the claimants will be competing among themselves for larger portions of a limited fund. That “the purpose of the limitation proceedings is not to prevent a multiplicity of suits but … to provide a marshalling of assets the distribution pro rata of an inadequate fund among claimants, none of whom can be paid in full”
The law is evolving toward a more modern rule that the value of all Vessels in a flotilla must be included in the limitation fund—regardless of the basis of the claim—when the Vessels are subject to common ownership, are engaged in a single enterprise, and are under common control at the time of the casualty. While workboat owners have the same limitation rights as the owners of ocean-going Vessels, the qualifications on their limitation rights are subject to and must be understood in light of the unique circumstances the workboat industry presents. Proper planning and the use of protective contractual provisions can assist in insuring, to the extent possible, that a workboat owner’s limitation rights remain available.
- Can only registered owners file a limitation suit?
To file a limitation suit, one must be an owner of a vessel. Courts have held that an “owner” can include not only registered owners but those who exercise dominion or control over the vessel. Owners could include:
- Individual with legal title to the vessel
- President and sole shareholder of a vessel owning company
- Owners at the time of the incident/injury in litigation that later sold the vessel
- Charterers who navigate vessels at their own expense
Vessel managers or others, who cannot be considered an owner pro hac vice by exercising sufficient control over the vessel, will not be afforded the right to make claims under the Limitation of Liability Act.
- Under what circumstances will the Owners be prohibited from filing limitation of liability claims?
Owners are prohibited from filing limitations of liability claims in certain circumstances. For personal injury claims, two claims for recovery are not subject to the Limitation of Liability Act:
- Past/lost wages owed to seaman; and
- Maintenance and Cure benefits for an injured seaman
- Under what circumstances can the vessel owner attempt to limit liability when faced with a claim for personal injury or wrongful death?
The two ways that the vessel owner can attempt to limit liability when faced with a claim for personal injury or wrongful death are:
- The owner may assert the limitation of liability claim offensively by filing a limitation action in a federal district court; or
- the owner can assert the Limitation of Liability Act defensively in response to an injury/death lawsuit, in either a state or federal court, by raising the affirmative defense of limitation.
- Before which Court should the Limitation Claim be filed?
The only courts that can govern limitation claims are federal district courts sitting in admiralty. The venue is governed by general federal venue rules.
- Under what grounds will be claimed for limitation be dismissed?
The court has the discretion to dismiss a limitation proceeding if filed in an improper venue or can at its discretion transfer it to the proper federal district court sitting in admiralty where the claim should have been filed.
- Within what time can the Limitation Claim be filed?
The time period for a vessel owner to file a limitation of liability claim, either by asserting it offensively or by affirmative defense, is six months from the date the vessel owner receives notice of the injury or wrongful death claim. The clock begins when the vessel owner receives proper written notice.
If the Vessel owner fails to file a limitation of liability claim within the 6-month time period, then the claim may be dismissed. If the claim is not dismissed, then the order consolidating claims in the federal forum can be lifted, and/or the stay may be lifted that precludes multiple actions.
- What constitutes a proper notice?
In order for the notice to constitute a proper notice; it must clearly:
(1) inform the vessel owner of the details of the incident/accident that caused the injuries; and
(2) inform the vessel owner that the vessel owner is responsible for the injuries in question.
Two tests have arisen to determine whether notice to a vessel owner is sufficient to trigger the statute of limitations:
- The vessel owner was informed of the actual and potential loss.
- That the claim may exceed the value of the vessel and the pending freight and The claim is subject to limitation.
- The notice demands a right.
- The notice blames the vessel owner for the losses and damages.
- The notice demands the vessel owner to pay what is owed to the Claimants.
- How does the court decide the issues?
If a claimant is unable to lift a limitation injunction and is forced to proceed in federal court with the limitation action, the respective burdens of proof for the claimant and vessel owner are as follows:
Claimants have the burden to show the court that the personal injuries/wrongful death was caused by the negligence or unseaworthiness of the vessel; if the claimant succeeds, the burden shifts to the vessel owner.
Vessel owners must prove that they lacked “privity or knowledge.” Privity and knowledge can be proven by the claimant by showing that the means of obtaining knowledge existed, or the knowledge could have been learned through a reasonable inspection of the vessel.