LECTURE 8

Limitation of Liability, Exclusions and Fund
1.0 INTRODUCTION
1.1 The 1976 Convention and Tonnage Limitation of Liability
2.0 PERSONS ENTITLED TO LIMIT LIABILITY UNDER 1976 CONVENTION- (Art.1)
2.1 Liability Limitation for Ship owners, Charterers, Salvors and Others
2.2 Insurance Liability and Legal Implications
3.0 CLAIMS SUBJECT TO LIMITATION (Art. 2)
3.1 Claims that arise on board or directly linked to the vessel’s operation or
salvage activities
3.2 Claims regarding actions taken to prevent or reduce losses
4.0 CLAIMS EXCEPTED FROM LIMITATION (ART 3)
5.0 CONDUCT BARRING LIMITATION (ARTICLE 4)
5.1 Liability Limitation Provision Examined
6.0 LIMITATION LAW, OLD VS NEW: BURDEN OF PROOF
7.0 CORPORATE PERSONALITY AND LEGAL LIABILITY EVOLUTION
7.1 Meridian Rule of Attribution and Corporate Liability
8.0 LIMITATION OF LIABILITY, RISK MANAGEMENT AND THE IMPACT OF ISM
8.1 Limitation Fund
8.2 Counterclaims
8.3 Amount of Limitation
8.4 Procedure in the Admiralty Court Regarding Limitation

LECTURE 08

LIMITATION OF LIABILITY AND EXCLUSIONS

• INTRODUCTION

The limitation of shipowners’ liability for maritime claims has been crafted to foster and safeguard trade. This practice encourages shipowners to remain operational and allows insurers to underwrite risks for third-party liabilities that would otherwise be uninsurable. The concept of limitation of liability is rooted in public policy rather than justice, with its origins in historical developments and its justification in convenience. Various international conventions, such as the Hague Rules 1924, the Hague-Visby Rules (HVR) 1968, and the Hamburg Rules 1978, govern the obligations and liabilities of carriers in the sea transport of goods, prescribing limitations on liability for cargo loss or damage.

For the carriage of passengers and their luggage by sea, the Athens Convention 1974, amended in 1976 and 1990, addresses liability and includes provisions for limitation. The Limitation Convention 1976, amended in 1996, introduces tonnage-based limitations for maritime claims beyond carriage-related incidents. The original Civil Liability Convention 1969 and the Fund Convention 1971, succeeded by the CLC and Fund 1992 Protocols, deal with liability and its limitation regarding oil pollution.

The rationale for limiting shipowners’ liability, as articulated by Mr. Justice Staughton, is to encourage insurance against liability while not tolerating outrageous conduct. One may argue that the concept of limitation of liability is overprotective of ship owners; it has endured over the years because of the public policy that encourages merchants.

While critics highlight benefits to shipowners, the broader impact includes competitive freight and fuel prices, available insurance, and the efficient movement of goods. The international consensus in favour of limitation, evidenced by the ratification of limitation conventions by maritime nations, underscores its role in supporting global trade.

Concerns about fairness to victims, particularly in passengers’ claims for loss of life or personal injury, have led to calls for a reevaluation of limitation, as seen in efforts to amend the Athens Convention. The focus on limitations related to environmental damage from oil pollution has intensified, prompted by incidents like the sinking of The Erika and The Kristal. However, the focus of this lecture is to study the principles of limitation of liability and exclusions as the law stands now.

• THE 1976 CONVENTION AND TONNAGE LIMITATION OF LIABILITY

In this section, we explore the legal aspects of liability limitation in connection with the 1976 Convention. The focus is on tonnage limitation concerning maritime claims, distinguishing itself from the previous approach under the Merchant Shipping Act (MSA) 1894, which was based on the ship’s value. Referred to as ‘tonnage’ limitation, it establishes a maximum limit linked to the size of the liable ship rather than its value.

This limitation, also termed ‘global,’ is intended to address scenarios where an owner faces diverse claims from various parties, aiming to establish a comprehen sive overall maximum limit for such claims. Other Limitation Conventions gover ning specific contracts, such as the Hague-Visby Rules for carriage of goods by sea and the Athens Convention 1974 for passenger transportation, have their limitations detailed in specialised literature. Separate limits exist for oil pollution under the CLC 1992.

The 1976 Convention struck a balance between claimants and shipowners by increa sing the limitation fund to adequately compensate claimants without rendering shi powners’ liability uninsurable.

The UK fully adopted the new Convention for international uniformity, incorpora ting it into domestic law through the Merchant Shipping Act (MSA) 1979. The MSA 1995 further contains the Convention, applying it to English law with certain reser vations. The Convention became effective on December 1, 1986, and countries not ratifying it may have their own national limitation systems or adhere to the 1957 Convention.

The Convention’s application and limitations are outlined in Article 15, allowing State Parties to make provisions for limitation on vessels intended for inland navi gation or those under 300 tons. However, it restricts the Convention’s application to ships engaged in drilling under specific conditions.

The Convention primarily applies to sea-going ships, with the UK maintaining the right to limit liability for all ships, whether sea-going or not. Minimum tonnage limits vary from State to State, with the UK establishing a new minimum for ships under 300 tons.

• PERSONS ENTITLED TO LIMIT LIABILITY UNDER 1976 CONVENTION- (Art.1)

1. Shipowners and salvors, as hereinafter defined, may limit their liability in accordance with the rules of this Convention for claims set out in Article 2.
2. The term “shipowner” shall mean the owner, charterer, manager and operator of a seagoing ship.
3. Salvor shall mean any person rendering services in direct connection with salvage operations. Salvage operations shall also include operations referred to in Article 2, paragraph 1(d), (e) and (f).
4. 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.
5. In this Convention the liability of a shipowner shall include liability in an action brought against the vessel itself.
6. An insurer of liability for claims subject to limitation in accordance with the rules of this Convention shall be entitled to the benefits of this Convention to the same extent as the assured himself.
7. The act of invoking limitation of liability shall not constitute an admission of liability.
   • LIABILITY LIMITATION FOR SHIP OWNERS, CHARTERERS, SALVORS AND OTHERS

According to the 1957 Convention, a person in possession but not in operation of the vessel, such as a mortgagee or ship-repairer, could limit liability under section 3(1) of the 1958 Act. However, the 1976 Convention clarified that this right is not granted to a mortgagee unless they take over the management and operation of the ship upon the owner’s default. The right is specifically reserved for the shipowner, encompassing the owner, charterer, manager, or operator of a sea-going ship. It’s important to note that the term ‘manager’ excludes crewing agents but includes those involved in the technical management or operation of the ship.

Charterer: A charterer has the ability to limit liability for claims for which they are responsible. Recent legal developments, such as the inclusion of a slot charterer in the category of ‘charterer’ under the Supreme Court Act 1981, suggest that a slot charterer may now have the right to limit liability. However, uncertainties existed regarding a charterer’s ability to limit liability for indemnity claims pursued by owners, as demonstrated in the case of The Aegean Sea. The court ruled against such limitation, citing reasons related to the scope and intent of the 1976 Convention.

Art 1(4) raises potential interpretation challenges regarding the extent of persons for whose acts the shipowner is responsible. However, the provision primarily grants an independent right of limitation to those for whose acts the shipowner, charterer, manager, operator, or salvor is vicariously liable. This includes individuals other than the master or crew, potentially extending to stevedores. The term ‘responsible’ in Art 1(4) implies vicarious liability for the person seeking to limit their liability.

Salvors: The new Convention introduces the right of limitation for salvors and any person rendering services in direct connection with salvage operations (Art 1(3)). Salvors may limit their liability for claims outlined in Art 2 of the Convention. The inclusion of salvors’ servants in the list of people with the right to limit is specified in Art 1(4). The case of The Tojo Maru exemplifies the impact of limitation rules on salvors and underscores the need for adherence to the agreed provisions.

• INSURANCE LIABILITY AND LEGAL IMPLICATIONS

The Convention introduces a novel provision in Article 1(6), allowing the liability insurer to enjoy the benefits of the Convention to the same extent as the assured. This provision becomes relevant when insurers face direct legal action from injured parties or the dependents of those who lost their lives on board, during ship operations, or salvage activities.

The right to take action against insurers originated from the Third Parties (Rights Against Insurers) Act 1930. This act enables the victim of the assured’s wrongdoing to overcome contractual barriers and access the benefits of the insurance contract between the liability insurer and the assured. This statutory subrogation comes into play in cases of the assured’s insolvency, preventing them from fulfilling the claim.

Two prerequisites must be met for a third party to pursue a claim against the insurer. Firstly, the third party must secure a judgement or arbitration award against the assured, establishing liability. Second, if the assured is insolvent, the judgement creditor must obtain a winding-up order for the assured’s company in England.

To address jurisdictional issues for foreign companies, such as shipowning entities, the claimant must establish jurisdiction in the UK, possibly by demonstrating the presence of assets within the jurisdiction. Notably, insurance proceeds payable in England under Protection & Indemnity (P&I) cover may be considered assets for this purpose.

Once these conditions are satisfied, the judgement creditor assumes the rights of the assured and can seek indemnification from the liability insurer. However, a significant hurdle arises from the “pay to be paid” rule in liability insurance contracts. This rule stipulates that the assured must first settle the third-party claim before being indemnified by the insurer. The Law Commission has recommended amendments to the 1930 Act to allow direct claims from liability insurers for personal injury or loss of life.

Additionally, potential challenges may arise for the creditor if the assured violated the terms of the insurance contract, particularly under sections 39(5) and 55(2)(a) of the Marine Insurance Act 1906. These sections absolve the insurer of liability for losses due to unseaworthiness or the assured’s willful misconduct.

The implications of these legal nuances are particularly significant in cases of personal injury or loss of life, where victims may be left without a remedy.

The Athens Convention 1974 governs the liability of carriers for passengers’ claims, addressing damages resulting from death, personal injury, or loss or damage to luggage caused by the carrier’s fault or neglect. The burden of proof may shift to the carrier in specific situations, simplifying the claims process for certain incidents. Limitations on ferry owners’ liability are outlined in Arts 7 and 8 of the Convention, with statutory defences available to insurers in cases of carrier misconduct.

• CLAIMS SUBJECT TO LIMITATION (Art. 2)

1. Subject to Articles 3 and 4 the following claims, whatever the basis of liability may be, shall be subject to limitation of liability:

• claims in respect of loss of life or personal injury or loss of or damage to property (including damage to harbour works, basins and waterways and aids to navigation), occurring on board or in direct connexion with the operation of the ship or with salvage operations, and consequential loss resulting therefrom;
• claims in respect of loss resulting from delay in the carriage by sea of cargo, passengers or their luggage;
• claims in respect of other loss resulting from infringement of rights other than contractual rights, occurring in direct connexion with the operation of the ship or salvage operations;
• claims in respect of the raising, removal, destruction or the rendering harmless of a ship which is sunk, wrecked, stranded or abandoned, including anything that is or has been on board such ship;
• claims in respect of the removal, destruction or the rendering harmless of the cargo of the ship;
• claims of a person other than the person liable in respect of measures taken in order to avert or minimise loss for which the person liable may limit his liability in accordance with this Convention, and further loss caused by such measures.

2. Claims set out in paragraph 1 shall be subject to limitation of liability even if brought by way of recourse or for indemnity under a contract or otherwise. However, claims set out under paragraph 1(d), (e) and (f) shall not be subject to limitation of liability to the extent that they relate to remuneration under a contract with the person liable.

3.1 CLAIMS THAT ARISE ON BOARD OR DIRECTLY LINKED TO THE VESSEL’S OPERATION OR SALVAGE ACTIVITIES

Claims that arise on board or are directly associated with the ship’s operation or salvage operations (Art 2(1)(a)) fall under Art 2 and may be limited, encompassing incidents in contract, tort, or other causes. Article 2(1)(a) pertains to claims such as loss of life or personal injury, where the crew or passengers of one ship seek damages due to another ship’s negligence in a collision, including property claims like damage to harbours.

The drafting of Art 2(1)(a) addressed challenges faced by salvors in limiting liability, particularly highlighted in The Tojo Maru case. Previously, only claims resulting from negligent acts or omissions on board or in the ship’s management, navigation, cargo handling, or passenger activities were limited. The current Convention significantly broadened the scope, covering claims directly linked to the ship’s operation.

The phrase ‘directly connected with the operation of the ship’ in Art 2(1)(a) may include claims arising from the negligence of individuals ashore, for whom the shipowner is responsible, performing duties related to the ship’s operation. This expansion could encompass personal injury or property damage claims during drydock activities, external repairs, maintenance work, provision of bunkers, or supplies, as these are directly tied to the ship’s operation.

3.2 CLAIMS REGARDING ACTIONS TAKEN TO PREVENT OR REDUCE LOSSEs

Claims related to actions taken to prevent or reduce loss (Article 2(1)(f)) should be considered in conjunction with the second sentence of Article 2(2). This provision explicitly states that limitations do not extend to claims concerning compensation under a contract with the responsible party. The inclusion of the phrase “claims of the person other than the person liable” clarifies that claims arising from actions taken to prevent or reduce loss under paragraph (f) are only applicable against the shipowner (the liable party).

An illustration of a loss for which the liable party can limit liability involves a claim by a cargo-owner whose cargo is at risk of loss. If a third party takes measures to minimise the potential loss of cargo on board, and the cargo-owner fully compensates the salvor for these measures, the shipowner can be held accountable, and the liability can be limited under this sub-paragraph. However, if the shipowner personally undertakes these measures, he cannot limit his liability. Furthermore, if additional damage occurs to the cargo during the implementation of these measures to prevent or minimise loss, the shipowner could still limit liability to the cargo-owner.

• CLAIMS EXCEPTED FROM LIMITATION (ART 3)

The rules of this Convention shall not apply to:

• claims for salvage or contribution in general average
• claims for oil pollution damage within the meaning of the International Convention on Civil Liability for Oil Pollution Damage, dated 29 November 1969 or of any amendment or Protocol thereto which is in force; (c) claims subject to any international convention or national legislation governing or prohibiting limitation of liability for nuclear damage;
• claims subject to any international convention or national legislation governing or prohibiting limitation of liability for nuclear damage;
• claims against the shipowner of a nuclear ship for nuclear damage;
• claims by servants of the shipowner or salvor whose duties are connected with the ship or the salvage operations, including claims of their heirs, dependants or other persons entitled to make such claims, if under the law governing the contract of service between the shipowner or salvor and such servants the shipowner or salvor is not entitled to limit his liability in respect of such claims, or if he is by such law only permitted to limit his liability to an amount greater than that provided for in Article 6.

Based on the text of Article 3 of the Convention as outlined above, Salvage and contribution claims in cases of general average are exempted from limitation under Article 3(a) of the 1976 Convention. This exclusion applies to direct claims against the shipowner by salvors or parties facing general average loss or sacrifice, except when a cargo owner has already paid their share to the entitled party. In such cases, the cargo owner can seek damages or indemnity from the shipowner, subject to limitation of liability.

A new Protocol in 1996, amending the 1976 Convention, introduces changes that increase potential liabilities for shipowners and insurers. Notably, Art 3(a) is modified to encompass claims for salvage and contribution in general average, including any special compensation claims under the International Convention on Salvage 1989.

Oil pollution claims, as defined by the Civil Liability Convention (CLC) and its 1992 Protocol, fall outside the scope of limitation under the 1976 Convention (Art 3(b)). However, in the UK, specific legislation (s 153 of the MSA 1995) limits the exclusion to claims related to liability under the CLC, allowing potential limitation for ship managers, operators, charterers, and salvors.

Nuclear damage claims, governed by international conventions, are excluded from limitation under Art 3(c). In the UK, specific legislation (s 185(4) of the MSA 1995) stipulates that claims falling under the Nuclear Installation Act 1965 can have unlimited liability.

Claims by the master and crew under Art 3(e) are subject to the law governing their employment contracts. If the contract is governed by UK law, s 185(4) of the MSA 1995 provides for unlimited liability. Otherwise, the applicable limitation depends on the foreign law governing the contract.

The McDermid v Nash Dredging case, though decided under the old system of limitation, emphasised the employer’s duty of care to employees. The House of Lords held that the employer could not escape liability for negligence, even if the duty of care was delegated to a captain, emphasising the non-delegable nature of the duty.

• CONDUCT BARRING LIMITATION (ARTICLE 4)
  • LIABILITY LIMITATION PROVISION EXAMINED

Provisions limiting liability include regulations outlining conditions for forfeiting the right to limit, with an exception in the Hague Rules (Art IV, r 5), explicitly stating that the carrier’s right to limit is not restricted. It specifies that neither the carrier nor the ship will be liable for loss or damage exceeding a certain amount unless the shipper declares the nature and value of the goods before shipment, recorded in the bill of lading.

The 1976 Convention poses challenges in challenging the right to limit. Parties to the Convention accepted a stringent test in return for higher limits. Article 4 stipulates that a person liable cannot limit their liability if it is proven that the loss resulted from a personal act or omission with the intent to cause such loss or recklessness with knowledge that such loss would likely occur.

Similarly, the Athens Convention 1974 (Art 13) and Hague-Visby Rules (Article IV, r 5(c)) echo the same sentiment, stating that the carrier cannot benefit from liability limits if the damage resulted from an intentional act or reckless omission with knowledge of the probable damage.

The Warsaw Convention 1929, as amended by the Hague Protocol 1955 (Art 25), and the Carriage of Goods by Air Act 1961 uphold similar principles, removing liability limits if it is proven that the damage resulted from an intentional act or reckless omission by the carrier, servants, or agents.

While the 1976 Convention specifically mentions ‘loss,’ the Athens Convention, Hague-Visby Rules, and Warsaw Convention only refer to ‘damage.’ In contrast, Article 8 of the Hamburg Rules provides clarity by encompassing loss, damage, or delay. The carrier cannot benefit from liability limitations if it is proven that the loss, damage, or delay resulted from an intentional act or reckless omission, and the test for breaking limitation remains stringent under these provisions.

• LIMITATION LAW, OLD Vs NEW: BURDEN OF PROOF

In accordance with sections 503 and 502 of the MSA 1894, as modified by the MSA 1958 following the 1957 Limitation Convention, the claimant had the right to receive full compensation unless the shipowner, asserting entitlement to limit or be exempted from liability, successfully demonstrated that the loss occurred without his ‘actual fault or privity.’ Many legal battles ensued, and it was typically challenging for the shipowner to meet this burden of proof.

Under the 1976 Convention, the underlying principle reflected in Article 2(1) is that the right to limit liability automatically applies unless the claimant proves that the party seeking to limit is responsible for misconduct barring limitation under Article 4. The court is not compelled to investigate whether the person liable is guilty of conduct barring limitation when initiating a limitation action.

Article 4 establishes that once the person liable establishes that the claim falls within the categories mentioned in Article 2, they are entitled to a limitation decree, unless the claimant proves specific facts as required by Article 456. For instance, the claimant must demonstrate that the loss resulted from the personal act or omission of the shipowner, or another person liable, committed with the intent to cause such loss or recklessly and with knowledge that such loss would likely occur.

It is evident that not only is the burden of proof challenging to fulfil, but it now lies with the claimant, reversing the situation under the old law where the shipowner bore this responsibility. Similar principles apply under other Conventions mentioned earlier, with some distinctions.

• Regarding whose act or omission, it is the carrier’s act or omission under the Athens Convention, the HVR, and the Hamburg Rules. In contrast, under the 1976 Convention, emphasis is placed on the personal act or omission of the person liable.
• In terms of whose conduct, the 1976 Convention defines the ‘person liable,’ distinguishing this from carriers specified in other Conventions. Other Conventions identify the carrier whose conduct is crucial.
• Concerning the loss or damage in question, the 1976 Convention refers to ‘such loss,’ while the Athens Convention refers to ‘such damage.’ The Hamburg Rules explicitly mention ‘such loss, damage, or delay,’ while the HVR and the Warsaw Convention use the term ‘damage.’

Section 503 of the 1894 Act, as amended, previously stipulated that ship owners would not be liable beyond certain amounts unless specific occurrences took place without their ‘actual fault or privity.’ This historical provision is crucial for compari son with the present Convention, particularly in relation to the concept of ‘act or omission.’

The old law considered the ‘act or omission of any person’ for limitation purposes, placing the burden on owners to demonstrate the occurrence without their ‘actual fault or privity.’ In contrast, Art 4 of the 1976 Convention narrows this to the ‘perso nal act or omission’ of the person liable, allowing liability limitation even if the act or omission is attributable to the master, crew members, or owner’s agents.

However, complexities arise if the manager or operator is part of the owner’s corpo rate structure. Questions may arise about the ‘directing mind’ of both owning and managing companies when the same mind and control govern both entities.

A significant distinction in wording exists in Art 25 of the Warsaw Convention, sta ting that the misconduct of carriers’ servants or agents disqualifies the carrier from limitation. Other Conventions do not specify ‘personal’ acts or omissions but refer to ‘act or omission of the carrier.’ English courts have accepted this interpretation in relation to the HVR and the Athens Convention.

The terms ‘fault or privity’ under the old system are contrasted with ‘intent or recklessly and with knowledge’ under the present system. Lord Denning MR’s inter pretation of ‘privity’ in the case of The Eurysthenes, sheds light on its historical development, emphasising knowledge and concurrence rather than willful mis conduct.

Under the old system, ‘actual fault’ meant no personal fault by the owner, and ‘pri vity’ meant no knowledge or concurrence. In the present system, either ‘intent’ or ‘recklessness’ is required, along with knowledge that such loss would probably result.

The interpretation of ‘recklessness’ in criminal law, as discussed in the context of the Warsaw Convention, involves subjective anticipation of likely damage from an act or omission. The Court of Appeal’s modified definition considers recklessness in conjunction with knowledge that damage would probably result, making the test subjective.

The provision for barring limitation demands actual knowledge or a deliberate avoidance of knowledge, excluding imputed knowledge. The narrow scope intended by the 1955/56 Hague Conference is evident, emphasising actual knowledge or a conscious turning away from knowledge. The greater the obviousness of the risk, the more likely recklessness is inferred.

• CORPORATE PERSONALITY AND LEGAL LIABILITY EVOLUTION

The concept of corporate personality, which involves attributing legal identity to a corporation, raises questions about accountability for misconduct within the company. Ships are often owned or operated by corporate bodies, and the law attributes a personality to corporations through a legal fiction. Since a corporation lacks a living mind and hands to carry out its intentions, liability attribution was initially addressed through the “alter ego” concept and later refined as the “identification” doctrine.

However, identifying key individuals within a company, often referred to as the ‘brains and nerve centre,’ has not provided satisfactory answers in all cases of attributing liability. A more recent approach, known as the “Meridian rule of attribution,” requires the court to interpret the substantive rule of law to determine whether the policy or intention of the rule necessitates attributing liability to the company, even if the misconduct occurred lower in the company’s hierarchy.

Examining the historical development of these concepts is crucial, especially in the context of limiting liability under the 1976 Convention. The ‘alter ego’ concept originated in a 1915 case, Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd, where the court considered the fault or privity of a managing owner in relation to unseaworthy conditions leading to a cargo loss. The case of The Lady Gwendolen in 1965 exemplifies the crossing of boundaries in attributing fault upwards from the marine superintendent to the assistant managing director, resulting in unlimited liability due to the company’s failure to provide a safe management system.

In Tesco Supermarkets v Nattrass (1972), the identification doctrine was officially adopted by the House of Lords. It emphasised that the person acting on behalf of the company is not an ‘alter ego’ but the ‘ego’ of the company, and the class of individuals identified with the company is limited to those entrusted with its control by the articles of association. The case clarified that liability is not vicarious; instead, the person acting as the company is regarded as embodying the company itself. The Safe Carrier case in 1994 reiterated the personal nature of the duty imposed on shipowners, charterers, and managers and applied the identification doctrine.

Therefore, the evolution of these legal concepts highlights the need to consider the overall scheme and purpose of statutes, conventions, or rules of law when interpreting duties and liabilities within a corporation. The identification doctrine, focusing on those in actual control of the company, has become a key principle in determining corporate liability for misconduct.

• MERIDIAN RULE OF ATTRIBUTION AND CORPORATE LIABILITY

The ‘Meridian rule of attribution,’ as interpreted through the lens of substantive legal principles, marked a significant shift in identifying responsible individuals within corporate structures. In 1995, the Privy Council, in the case Meridian Global Funds Management Asia Ltd v Securities Commission, introduced a more flexible approach to attributing acts or omissions to a corporation. Rather than a strict hierarchy-based identification, it emphasised that the rule of attribution involved interpreting the relevant substantive rule of law in each case.

In the case Meridian Global Funds Management Asia Ltd v Securities Commission, Lord Hoffmann defined the rule of attribution as follows: when the court deems the law applicable to companies but excluding ordinary vicarious liability, a special rule must be crafted to align with the substantive rule’s intention. This process, always as a matter of interpretation, involves considering how the law was intended to apply to a company and whose act or knowledge should count as that of the company.

From this explanation, it becomes evident that the central issue is choosing the appropriate attribution rule for corporate liability. In cases of attributing liability to the company for a tort committed by employees, the general rule of vicarious liability applies. However, when a law imposes liability based on personal fault and a specified level of conduct, the company’s articles of association or board decisions help identify the directing mind of the company. If the substantive rule of law requires considering individuals other than directors, a special rule is fashioned for that specific rule of law.

The Meridian approach underscores that the choice of an attribution rule depends on the purpose behind the substantive liability rule, which varies across different laws. For instance, in statutory criminal offences, the conduct of managerial versus directorial positions may be considered for company liability. In the context of an international convention, the court looks at the overall purpose of the convention to ensure uniform application.

• LIMITATION OF LIABILITY, RISK MANAGEMENT AND THE IMPACT OF ISM

By applying the principles articulated in relevant legal precedents, it is argued that the interpretation of the substantive rule of law and policy underlying the 1976 Limitation Convention does not allow for an expansion of the group of individuals entrusted with the control of a company or specific functions thereof, as outlined in the company’s articles or Board decisions pursuant to those articles.

The philosophy and purpose of the 1976 Convention prohibit the extension of the rule of attribution beyond the board level. While constructive knowledge is considered in determining liability in certain circumstances, it is insufficient for the purpose of limitation under this Convention.

Consequently, delegating the supervision of safety matters in a ship or shore management to a designated person appointed under the International Safety Management (ISM) Code does not automatically attribute the actions or omissions of that person to the company, unless granted full discretionary powers and control for the tasks. In contrast to the 1957 Limitation Convention, the misconduct of the designated person does not preclude the limitation of their employers under Article 4 of the 1976 Convention. To bar limitation, it must be proven that the loss resulted from the personal act or omission of the ‘controlling mind and will’ of the company, committed with the intent to cause such loss or recklessly and with knowledge that such loss would probably occur.

Unlike the Warsaw Convention’s Article 25, which considers not only the personal act or omission of the carrier but also of their servants or agents, the designated person cannot limit personal liability under Art 4 if sued for misconduct. Insurers may deny liability unless specific coverage for reckless conduct has been obtained.

The direct access of the designated person to senior management and their reporting duties expose the senior management and their management practices to scrutiny regarding the prevention of incidents causing liability. A recent decision, Rolls Royce plc v Heavylift-Volga Dnepr Ltd, underlines the importance of a competent safety system and management practices. While negligence was found, it did not amount to misconduct or recklessness under the Convention, allowing for limitation.

This decision serves as a reference in limitation cases under the 1976 Convention, emphasising the challenge for claimants to break limitations despite system failures. Future cases may test this in the context of the International Safety Management (ISM) code, and the extent of deficiencies in a management system will determine the right to limit.

Different criteria apply to criminal liability cases arising from breaches of statutory offences under the ISM code, as specified by the statutory instrument making the ISM code part of English law. Those seeking to limit should be aware that situations similar to The Lady Gwendolen, The Marion, The Garden City, and The Anonity are to be avoided at all costs. These cases may prompt inquiries into why the directing mind of the company failed to ensure a proper safety system was in operation, potentially revealing a willful blindness to knowledge provided by the ISM code and reckless actions leading to the claimed loss. Assessing the knowledge of the person seeking to limit will depend on skillful cross-examination in each case.

• LIMITATION FUND

Article 11 of the 1976 Convention outlines the creation of a limitation fund, which the court will distribute to settle claims subject to limitation. Those accused of liability can form a fund with the court in the State Party where legal proceedings are initiated for claims subject to limitation. Paragraph 8(3), Pt II, Sched 7 grants the court discretion to suspend proceedings related to claims arising from the incident for which the fund was established. Article 13(1) specifies that once a limitation fund is established, claimants are prohibited from pursuing claims against other assets of the person on whose behalf the fund was created. Paragraph (2) of Art 13 allows the court to release a ship, under certain conditions, if the limitation fund is constituted at specific ports or in the state where the arrest occurs. However, these rules apply only if the claimant can bring a claim against the limitation fund, and the fund is genuinely available and transferable for that claim.

Regardless of a claimant’s assertion that the shipowner’s conduct bars limitation, Arts 2 and 13 of the 1976 Convention dictate that a liable party can only be compelled to establish one fund, as per Art 11, without being required to post bail for the ship’s release. Once the ship is released, further actions are barred, but the person releasing the ship is deemed to have submitted to the court’s jurisdiction (para 10, Pt II). The law governing the constitution and distribution of the fund is the law of the State where the fund is established (Art 14). No lien or other right on any ship or property can affect the distribution proportions specified in Art 12 among multiple claimants (para 9, Pt II).

• COUNTERCLAIMS

Article 5 of the Convention stipulates that when a person entitled to limitation has a claim against the claimant from the same incident, their respective claims are set off against each other. The Convention’s limits apply to the remaining balance after the set-off. This principle was illustrated in The Khedive case of 1882, where ships V and K collided, resulting in claims and counterclaims. The court applied limitation to the balance remaining after deducting the smaller claim from the larger one.

• AMOUNT OF LIMITATION

The Convention establishes general limits for claims, excluding passenger claims, based on a sliding scale depending on the vessel’s tonnage. Hovercraft limitation is calculated by reference to the maximum operational weight. Claims for personal injury or loss of life receive preferential treatment, with varying limits based on tonnage ranges.

Two separate funds exist for personal claims and other claims, with the latter available to cover any unsatisfied balance of personal claims, which then rank equally with other claims. The unit of account, defined in Art 8, is stated in Special Drawing Rights (SDR) and converted into the national currency of the State where limitation is sought.

The 1998 Order amends the 1976 Convention to implement the 1996 Protocol, increasing limitation figures, preventing overlap under the Athens Convention, and addressing the International Convention on Liability and Compensation for Damage in connection with the Carriage of Hazardous and Noxious Substances by Sea 1996.

The 1976 Convention applies globally, addressing each distinct injury occasion, and provides a separate limitation fund for passenger claims.

• PROCEDURE IN THE ADMIRALTY COURT REGARDING LIMITATION

Enforcing the right to limit involves three methods: relying on limitation as a defence, bringing a counterclaim with the Admiralty Court’s permission, or initiating a limitation claim through a claim form. If a defendant asserts the right to limit through defence and counterclaim, the limit applies only to that claim. To avoid separate proceedings, a limitation action can be instituted, making the limitation fund valid against all claimants.

The Convention does not specify jurisdiction for limitation claims, allowing claimants to choose a forum. The only restriction is under Art 6A of the Brussels Convention, which links jurisdiction in liability actions to claims for limitation. When a limitation fund is constituted, a caveat against arrest is issued. After a limitation decree is granted, the Admiralty Court may order a stay of related proceedings, direct the claimant to establish the fund, or provide directions for decree advertisement. The limitation fund is distributed to claimants proportionally based on their established claims, with no liens or other rights affecting distribution proportions.

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08 Lecture 8 AML LIMITATION OF LIABILITY, EXCLUSIONS AND FUND