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Where the Member or a Co-assured is entitled to limit his liability pursuant to any rule of law, the maximum recovery under a P&I entry is the amount to which the Member or the Co-assured may limit his liability.
(A) Explanatory remarks
Shipowners have traditionally had the right to limit their liability for the legal consequences of their actions. This right has generally been regarded as essential in order to ensure the commercial viability of the shipping industry. Until the middle of the twentieth century the right to limit was normally restricted to the registered or beneficial owner of the ship. As a result, various attempts were made to circumvent the application of limitation of liability by bringing claims against parties other than the shipowner. Today, the right to limit liability is available in many circumstances to the owners, charterers, managers, operators and liability insurers of a ship, as well as to the master, Crew members or other servants when acting in the course of their employment.
The right to limit liability will often arise under international conventions that regulate liability for certain specific types of claim, e.g. the limitation of liability for cargo claims under the package limitation provisions of the Hague, Hague-Visby and Hamburg Rules and, if and when they come into force, the Rotterdam Rules, or the limitation of liability for personal injury and death claims brought by passengers under the Athens Convention. However, the right to limit liability may also arise under other international conventions that regulate the right to limit liability more broadly in relation to a wider spectrum of maritime claims, e.g. the 1976 London Convention on Limitation of Liability for Maritime Claims (the 1976 Limitation Convention) or as amended by the 1996 Protocol thereto.1
It is in the interests of the membership as a whole that each Member should make full use of the right to limit his liability whenever possible in order to protect the Association and the membership funds against liability or loss that is otherwise avoidable. This also reflects the obligation that each Member has to take, and to continue to take, such steps as may be reasonably necessary for the purpose of averting or minimising any liability etc., for which he may be insured by the Association.2 Furthermore, it should also be appreciated in this connection that if the Association has incurred direct liability to claimants by the provision of the ’blue cards’ as evidence of compulsory liability insurance that are required by international conventions3 or national or regional laws,4 the Association may be entitled to limit its liability to any claims that may be made directly against it by third party claimants pursuant to such ‘blue cards’ even if the Member would not be entitled to do so if the claim had been brought against the Member rather than the Association.5
(B) Where the Member or a Co-assured is entitled to limit… (Rule 51)
Rule 51 makes it clear that, where a claim is brought by a third party against either the Member or a Co-assured6 each one of them is expected to make full use of any rights that he may have to limit his liability, and neither of them has the right to recover from the Association any sum that is in excess of the sum to which he is entitled to limit his liability. In the majority of cases, the Member, and any one or more Co-assured that may be severally and/or jointly liable to the third party together with the Member, will be able to limit liability under the same limitation rules in the same proceedings in the same country. In such circumstances, only one claim for compensation can be made against the Association for such liability and the compensation payment that is made by the Association to the Member or to the Co-assured will also be in satisfaction of any liability that the Association may have to the other for such claim.7
However, it is possible that the third party may bring the same claims against the Member and one or more Co-assureds separately in different countries, e.g. against the owner of the Ship in country A and against the Ship manager in country B, and that those countries may apply different limitation rules. For example, country A may be subject to the 1976 Limitation Convention whereas country B may not give effect to that convention, but to particular domestic rules of law that govern limitation rights. If the owner of the Ship (the Member) and the Ship manager (the Co-assured) both incur liability as a result of such separate legal actions, cover is available for both parties so long as they have each sought to invoke any rights that may be available to them to limit their liability under the applicable law. The owner of the Ship and the Ship manager (who qualifies as a Co-assured pursuant to Rule 78.3 since he is carrying out operations and/or other activities that are customarily carried out by a shipowner) are both entitled to compensation from the Association for their respective liability.8
Rule 51 makes no express reference to the limitation of the liability of an Affiliate but cover can be extended to Affiliates on a discretionary basis.9 However, if cover is extended in this way, the Affiliate is not entitled to recover more from the Association than would have been recoverable by the Member in the relevant circumstances.10 Therefore, the Association is also entitled in practise to invoke the limitation provisions of Rule 51 vis-à-vis Affiliates.
(C) …his liability pursuant to any rule of law… (Rule 51)
Rule 51 is applicable when the Member has the right to limit his liability pursuant to ‘any rule of law’ which, in this context, means a rule that is contained in, or can be derived from, any act, code, statute or other legislation of a country, or is the result of a firm and established rule of the common law.
It is possible that the Member’s right to limit his liability may arise only under a provision of the domestic law that is applied in, and by, the country where the third party has brought the claim against the Member.11 However, a right to limit liability will more frequently be based on an international convention the provisions of which have been enacted by the country where the third party claim is brought, or by the country where the Member seeks to invoke the rights that are conferred on him by the convention, e.g. by constituting a limitation fund as security for third party claims in the country where one of his ships has been arrested.
Some countries have laws that require a limitation fund to be constituted by paying the limitation amount into court before the right to limit liability can be pleaded in legal proceedings whereas, in other countries, a right to limit liability may be pleaded as a defence to a legal action without the need to constitute a limitation fund. Rule 51 does not distinguish between the two; it simply makes it clear that the maximum sum that the Member can recover from the Association will be the amount to which he may limit his liability, regardless of the procedure that must be followed in the relevant country in order to protect and enforce that right.
Most countries also require interest to be paid in addition to the limitation amounts that are specified by the applicable law. If a limitation fund must be constituted by payment into court, the sum so payable will usually include interest from the date of the occurrence of the event until the date that the limitation fund is constituted. Thereafter, the total sum so constituted will continue to earn interest until the limitation fund is distributed between claimants in due course. However, if limitation can be pleaded as a defence, the court will usually, when giving judgement on the third party claim, order that interest should be paid on the limitation amount from the date of the occurrence of the event until the date of judgement. In either case, cover is available under Rule 51 for any interest that has been paid by the Member in addition to the limitation amount.
In some instances, parties may agree the limit of liability that is to apply inter se. This occurs most frequently in the form of a specific provision of a contract of carriage. If that limit is higher than that which would otherwise be applicable under the relevant law, the Member that incurs liability under such a contract cannot recover from the Association any sum that exceeds the amount to which he would otherwise have been able to limit his liability under the applicable law.
(D) …the maximum recovery under a P&I entry is the amount to which the Member or the Co-assured may limit his liability… (Rule 51)
If the Member or the Co-assured is entitled to limit his liability for a particular claim then the maximum sum that is recoverable from the Association in respect of such claim is the amount to which the Member or the Co-assured respectively is entitled to limit his liability.
The Association does not have the right to reduce the amount of compensation that is payable to a Member under Rule 51 unless the Association can demonstrate that the Member had the right to limit his liability for the third party claim to an amount that is lower than that which has in fact been paid by the Member to the third party. Therefore, the onus of proof is on the Association in this regard. The Association must demonstrate not only that the Member had the right in law to limit his liability, but also that it was possible to do so in fact in the country where the third party claim was being brought against him.
The Association must also demonstrate that the Member would not have lost the right to limit his liability for the claim in the particular circumstances. Most limitation conventions and national statutes provide that if the person who is seeking the right to limit his liability is guilty of a certain type of conduct, then that person will lose the right to limit. However, the severity of conduct that is required if the right to limit is to be lost can differ substantially under different laws and conventions. In the case of the 1957 Limitation Convention and the US Limitation of Liability Act,12 privity13 on the part of the higher management of the company is sufficient, whereas under the 1976 Limitation Convention and its 1996 Protocol, and under CLC 92, a person will lose the right to limit only 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.”
If it is proved that the Member has lost the right to limit his liability then the Association has no right under Rule 51 to reduce the amount of compensation that is payable to him. However, if the Member is guilty of the conduct that would deprive him of his right to limit under the 1976 Convention or its 1996 Protocol, or under CLC 92, or another similar international convention such as the Bunkers Convention, it is very unlikely that the Association would be liable to indemnify him since such conduct would in all probability constitute the type of conduct that would deprive the Member of cover pursuant to the provisions of Rule 72.14
In some instances, the Member may decide to discharge his liability for third party claims by paying more than the amount to which he is legally entitled to limit his liability since the prospects of convincing the court or tribunal seized of the case that he has such right are not good, and/or because such proceedings can be expected to be expensive and time consuming. However, the Member should consult the Association15 before doing so since, otherwise, there is a risk that the Association may reject or otherwise reduce the compensation that is payable to
1 For more detailed commentary see Chapter 21 of the Gard Guidance on Maritime Claims and Insurance.
2 See the Guidance to Rule 82.1.b
3 Such as the CLC, Bunkers, and Wreck Removal Conventions and the 2002 Protocol to the Athens Convention. For further commentary, see Chapter 220.127.116.11 (People Claims), Chapter 18.104.22.168.1.5 (Pollution Claims) and Chapter 22.214.171.124 (Wreck Removal Claims) of the Gard Guidance on Maritime Claims and Insurance.
4 US law requires the owners and operators of cruise ships to provide evidence of such insurance in the form of a guarantee that is to be provided to the US Federal Maritime Commission (FMC) and the European Union requires a similar form of certification pursuant to the EU Passenger Liability Regulation (EC) No. 392/2009 (PLR).
5 For further commentary see (B) and (I) to the Guidance to Rule 28, (D) to the Guidance to Rule 38 and the Introduction to Rule 40.
6 See the Guidance to Rule 1.1 for the definition of the terms ‘Member’ and ‘Co-assured’, as well as the Guidance to Rules 78 and 79 for the rights and obligations of Co-assureds under the contract of insurance.
7 See the Guidance to Rule 79.2.
8 That provision in Rule 78.8 which provides that the payment by the Association of indemnity to a Coassured in respect of a claim will discharge the Association from any further liability in that regard, does not apply to Co-assureds in the categories referred to in Rules 78.3 and 78.4.
9 See the Guidance to Rules 1.1, 78.1 and 78.7.
10 See the Guidance to Rule 78.7.
11 For example, in the United States, pursuant to the Oil Pollution Act 1990.
12 US Limitation of Shipowners’ Liability Act (46 U.S.C. S 181-189).
13 ‘Privity’ has been defined by the English court as ‘knowledge and consent’. See EURYSTHENES (1976) 2 Lloyd’s Law Rep. 171.
14 See the Guidance to Rule 72.
15 See the Guidance to Rules 82.1.c and 82.1.f.
16 See the Guidance to Rule 82.2