Waiving limitation goodbye?

November 2016

A recent court decision has confirmed that shipowners can waive their legal right to limitation.

In this article, Lewis McDonald of Skuld Offshore and Durai Shunmugam of Stephenson Harwood look at the practical and insurance implications of that decision, and how a contractual obligation to waive this important right can be managed in the real world.

What is limitation

When lawyers talk of limitation, they are referring to a process whereby a shipowner can, through a mechanism set out under law, cap their liability for certain losses, like property damage or personal injury caused by their vessel, even if the cost of making good the damage exceeds that sum. This significant protection for shipowners is, however, often met with consternation from injured parties and pre-emptive workarounds are frequently used to try and make shipowners (and their insurers) responsible for the full extent of damage caused.

One such workaround is to include in the contract wording which says that the shipowner expressly agrees to pay for the full loss and/or damage they cause. A clause(1) of that type was recently reviewed by the Privy Council (which is comprised of UK Supreme Court judges) in the "Cape Bari" [2016] UKPC 20.

Why is this relevant?

Clauses like the example above have recently started to become much more common in offshore contracts. This is likely a response to the fact that a large part of the offshore service fleet is relatively small in terms of GT and, as limitation is calculated with reference to that, the limitation level could be considered by their contractual partners as disproportionately low compared to the level of damage they could cause.

However, if a shipowner enters into a contract that includes a waiver of the right of limitation they are exposed to a potentially significant commercial liability as, when an assured is entitled to limit at law, standard P&I insurance will not respond to any liability beyond that level. If the damage in the Cape Bari case had been caused, for example, by a 1675 GT anchor handler, under the same limitation convention used in that case, the owners would be entitled to limit at roughly USD 2.2 million. If the owners had waived their right to limit, the commercial exposure they could be facing would be roughly USD 20 million!

Clearly this is not an exposure which the shipowner would want or should have to assume but, at the same time, in the current market, negotiating terms is as hard as it has ever been and contracts are often presented on a take it or leave it basis. On the face of it, this potentially leaves the shipowner in the invidious position of either accepting the risk or turning down a contract in a market where few are being awarded and many vessels are out of work.

What Skuld offers

To mitigate against the risk that the shipowner will be exposed to the difference between the sum they could have limited to, and the actual damage incurred, Skuld can offer an additional insurance cover which can respond beyond the limitation sum up to a capped amount.

To be able to do so, it is important that Skuld Offshore's team of contract lawyers review the operation contract in advance of it being executed and the operations commencing, and thereafter discuss matters with underwriters in order that an underwriting solution can be explored, meaning that the shipowner may not be forced to carry this burden alone.

The "Cape Bari" case

Facts

When coming alongside to discharge a cargo of crude oil, "MT Cape Bari" collided with a berth at a terminal in Free Port, Grand Bahama, causing substantial damage. The owner of the terminal, BORCO, claimed damages from owners of approximately USD 22 million plus interest.

Owners applied for and were granted a court order setting up a limitation fund after submitting that they were entitled to limit their liability under an international limitation convention that formed part of the laws of the Bahamas. Under the convention, limitation was fixed at around USD 17 million, meaning BORCO would be left to pay the remaining balance of USD 5 million required to make good the damage.

However, BORCO applied to set aside that order on the basis that owners had contractually agreed to give up their right of limitation by signing BORCO's "Conditions of Use" of the port, clause 4 of which provided:

"If in connection with, or by reason of, the use or intended use by any vessel of the terminal facilities or any part thereof, any damage is caused to the terminal facilities or any part thereof from whatsoever cause such damage may arise, and irrespective of weather [sic] or not such damage has been caused or contributed to by the negligence of BORCO or its servants, and irrespective of whether there has been any neglect or default on the part of the vessel or the Owner, in any such event the vessel and the Owner shall hold BORCO harmless from and indemnified against all and any loss, damages, costs and expenses incurred by BORCO in connection therewith. .... "

The Court process

At first instance, the court agreed with BORCO, holding that, upon a true reading of the "Conditions of Use", the owners had contracted out of their right of limitation. Owners appealed and the Bahamas Court of Appeal reversed the decision, holding that whatever the wording of the "Conditions of Use", as a matter of law, it was not permissible to contract out of the right limitation.

BORCO then appealed to the Privy Council, arguing that it was permissible for owners to contract out of the right of limitation, both on the true interpretation of the relevant law and on a true construction of the "Conditions of Use".

General principles of limitation

After considering English and Hong Kong law authorities, the Privy Council set out some general principles in relation to waiving the right to limit:

a) it is possible for a ship owner to contract out of or waive the right to limit liability under the 1976 Convention (or its predecessor, the 1989 Convention) - nothing in the words of the Convention prevents this;

b) for a party to abandon or contract out of valuable legal rights, the provisions relied upon must make it clear that this is what is intended. The more valuable the right, the clearer the language needs to be;

c) when construing whether a contract seeks to waive a right, the starting point is that the right in question is treated as being known and understood by the parties to apply;

d) the right is then considered written into the contract unless there is a provision in the contract which clearly and unequivocally excludes it such that the two cannot be read together and the right must therefore be excluded;

e) it may be possible to exclude the right without express reference to the statute or convention, but the right must be clearly excluded, expressly or by necessary implication, such that a reasonable observer would agree that the owner agreed to waive it.

On that basis, the Privy Council set aside the Appeal Court decision, holding that the right of limitation could be contracted out of. However, it also held that, on a true construction of the "Conditions of Use", owners did not actually agree to exclude their right to limit, as that right could exist alongside the contractual wording, with BORCO entitled to an indemnity "up to the maximum recoverable pursuant to the Convention".

Does limitation always apply?

There are certain, very specific circumstances in which it is possible for the right of limitation to be broken. Using the Convention on Limitation of Liability for Maritime Claims 1976 as the example, Article 4 of that narrates:

A person liable shall not be entitled to limit his liability if it is proved 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.

Therefore, other than when the right of limitation is contracted out of, the only other way that it can be set aside is if the incident falls within this exception.

The circumstances in which article 4 could be invoked were recently considered by the Admiralty court in the case of the Atlantik Confidence, a vessel which sank while laden with cargo. The owners of the vessel contended that this was as a result of flooding following a fire but cargo insurers' position was that the vessel had been scuttled based on, amongst other things, a change of course out to deeper waters, the conduct of the master and chief engineer around the time of the incident and the owners' financial circumstances.

On considering the evidence, the court concluded that this was a deliberate scuttling performed by the chief engineer with the knowledge of the master on the instructions of the owners. The court therefore held that the loss resulted from the personal act of owners, which was committed with the intent to cause the loss incurred, and therefore refused the owners' application for limitation decree.

Although these are fairly unique circumstances, it does show that where the court is satisfied that the test laid out in Article 4 is met, they will be willing to set aside this significant shipowner right.