Can A Ship Owner Exclude His Right To Limit Liability By Contract?

by Ben Browne

By Section 185 and Schedule 7 Merchant Shipping Act 1995 pursuant to the Convention on Liability for Maritime Claims 1976 (“LLMC”) ship owners can limit their liability in respect of loss of life and personal injury, or loss of or damage to property occurring on board, claims in respect of loss resulting from delay in the carriage by sea of cargo passengers or their luggage and claims in respect of other loss resulting from infringements of rights other than contractual rights occurring in direct connection with the operation of the ship or salvage operations. Many countries, including the UK, have ratified the 1996 Protocol to the LLMC and for those countries the limits are to be raised on 8th June 2015 by slightly over 50%.

The ship owner’s right to limit is of great value to ship owners and their insurers and is understandably disliked by those on the other side of the claims in respect of which a ship owner can limit. For this reason attempts are often made to exclude a ship owner’s right to limit by contract. For many years it was thought that a ship owner’s right to limit liability under the LLMC could be foregone by means of a contract between the limiting party and the claimant (Marsden Collisions at Sea 13th Edition para 16-23). In Clarke -v- Dunraven [1897] A.C. 59 (a Thomas Cooper case) the Mudhook Yacht Club advertised a regatta to be held in the Clyde in July 1894. The owners of the “SATANITA” and the “VALKYRIE” each signed a letter to the secretary of the club undertaking that while sailing in the regatta they would obey and be bound by the sailing rules of the Yacht Club Association. Rule 32 of the rules said that any yacht disobeying or infringing any of these rules “shall be liable for all damages arising therefrom”. In breach of the rules the “SATANITA” collided with and sank the “VALKYRIE”. The owners of the “VALKYRIE” sued the “SATANITA” and the House of Lords held that the words “all damages” excluded the operation of Section 54 of the Merchant Shipping Amendment Act 1862 pursuant to which the owner of the “SATANITA” was trying to limit liability. Accordingly the “SATANITA” was liable in full for the loss of the “VALKYRIE”.

Clear words have always been required to exclude the right to limit (Ingram & Royle -v- Services Maritimes [1914] 1 K.B. 541 at 551 and 533).

The ability to restrict an owner’s right to limit by contract was confirmed in The Kirknes [1957] P 51. In that case the owner of the tug “HILLMAN” entered into a contract to tow the plaintiff’s vessel “KIRKNES”. The tug and tow collided with the loss of M.Tug “HILLMAN” and the lives of four crew members. The tug owners sued the owners of the tow on the basis that they had agreed under the UK Standard Towage Conditions to “pay for all loss or damage and personal injury or loss of life and shall also indemnify the tug owner against all consequences thereof…” . Willmer J. held that if the tug owners’ claim had been in respect of a contractual liability to indemnify and compensate the tug owners for a loss on the happening of a certain event the plaintiffs could not have limited their liability. However in fact the tug owners’ claim was based on damages for negligence and because the wording of the contract was not sufficiently clear to exclude the operation of Section 503 Merchant Shipping Act 1894 the owners of the barge “KIRKNES” could limit their liability.

The uncertainty about the ship owners right to exclude limitation by contract is one of the many reasons why TOWCON contains a knock-for-knock provision in clause 18 which the UK Courts recognise and uphold (although this is not a universally adopted approach – see for example Canada): Smit International -v- Josef Mobius [2001] CLC 1545 and the A Turtle [2009] 1 Lloyd’s Rep 177.

Since The Kirknes was decided the LLMC was introduced. Article 2(2) LLMC states that with certain exception claims “shall be subject to limitation of liability even if brought by way of recourse or for indemnity under a contract or otherwise”. This means that the finding in The Kirknes that if the claim had been under contract the barge owner would have enjoyed no right to limit would probably have been decided differently now. Shipping lawyers have been slow to recognise this important change in the legislation but in Sun Wai Wah Transportation -v- Cheung Kee Marine Services [2009] HKCFI 1096 the Hong Kong Court held that, despite an express indemnity in favour of charterers, Cheung Kee Marine Services, the person obliged to indemnify them, Sun Wai Wah Transportation, was entitled to limit its liability. As the Court pointed out Cheung Kee, the charterers, could themselves limit their liability as against third parties so no injustice was done.

The latest decision on the point emerged from the Bahamas Court of Appeal in May 2014 in the “CAPE BARI”. In that case the owners of the “CAPE BARI” entered into a contract with Bahamas Oil Refinery Company (“BORCO”) which contained clauses relieving BORCO from any responsibility for any damage in connection with the use of the terminal and another clause obliging the owners to indemnify BORCO against “all and any loss, damages, costs and expenses incurred by BORCO, in connection therewith”.

The Bahamas Court of Appeal relied on the English Court of Appeal’s decision in the Leerort [2001] 2 Ll. L.R. 291 and decided the only way a ship owner may now lose his right to limit is where it is proved the loss was caused by his personal act or omission committed with intent to cause such loss, or recklessly, and with knowledge that such loss would probably result as provided by the Convention itself. In other words the Court decided that the right to limit liability could now no longer be excluded by contract. This is a considerable extension of what Lord Phillips M.R. (as he then was) said in the Leerort (supra) as his judgment did not address the issue of excluding the right to limit by contract. It is therefore not entirely surprising that the “CAPE BARI” is being appealed later this year to the Privy Council whose judgment will be eagerly awaited by many in the maritime industry.

This article is filed under:  Industry news

About the contributor

  • Ben Browne Consultant

    Ben is a member of our Shipping group and a member of the Emergency Response team. He specialises in Insurance and Reinsurance work and has a particular emphasis on casualty work.

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