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Article: Legal implications of a mega box ship casualty: Limitation and cargo claims

11 July 2019

Authors:

Tony Goldsmith
Partner,
Hill Dickinson LLP
T +65 6576 4720
E tony.goldsmith@hilldickinson.com

Marina Taouxi
Senior Associate,
Hill Dickinson LLP
T +65 6576 4724
E marina.taouxi@hilldickinson.com

Limitation of liability is always a crucial consideration for a shipowner following any major casualty. Where a casualty involves a large container ship, limitation often becomes particularly relevant.

The number of containers and values involved means limitation is especially
important for the shipowner of a mega box ship. Added complexities arise from the fact that several different carriers may have cargo on board. Such carriers could be the ship’s charterer, slot charterer, forwarder or NVOCCs (non-vessel operating common carriers), each of which will have its own individual bill of lading terms and conditions.

Means to limit

Bearing in mind the potential for numerous claims aggregating to high value and consequent underlying costs, there are typically two distinct but interlinked means of limiting liability that are available to a sea carrier:

i. The carrier’s right to rely on a tonnage limitation regime arises under convention or statute governing the limitation of liability of owners of seagoing ships. Although different jurisdictions have different bases for calculating limits, this form of limitation applies not only to claims arising from the carriage of goods, but also to other claims that may arise from a casualty, such as hull and property damage or personal injury. Cargo claims will rank on an equal footing with other claims arising from the same incident[1].
ii. The package limitation under Article IV, Rule 5 of the Hague Rules and Hague-Visby Rules and Article 6 of the Hamburg Rules. This right of limitation is restricted to claims for loss or damage to the cargo and the limit is calculated by reference to the specifics of the cargo.

These regimes are not mutually exclusive. Therefore, a carrier that seeks to limit liability under package limitation is potentially also entitled to limit liability under the applicable tonnage regime.

Tonnage limitation

At the relatively early stages of a major casualty, the owner’s interests will
be weighing up whether the potential claims against them are likely to be sufficiently substantial, to justify constituting a limitation fund in an appropriate jurisdiction. Cargo claims are often one of the main category
of claims that owners would face, but there could well be significant other
claims from charterers or third parties.

Most jurisdictions incorporate one of the international conventions on the
Limitation of Liability for Maritime Claims (Limitation Conventions) into
their domestic law[2]. These calculate the limitation fund based on the
ship’s gross tonnage, hence the use of the phrase ‘tonnage limitation’[3]. The establishment of a limitation fund (or an alternative permitted in the relative jurisdiction) means that all successful claims will be paid out of the fund on a pro-rated basis.

Tonnage limitation 

For a given gross tonnage, the limitation fund will differ based on the jurisdiction as it will be dependent on which Limitation Convention applies. 

By way of illustration, the table above demonstrates the differences on the size of the limitation funds between the various conventions for a large container ship. 

A party contemplating the establishment of a limitation fund
will inevitably need to consider the limitation regime in the jurisdictions associated with the casualty in question, or any alternative
potentially available jurisdictions. 

Where a party is facing claims in various countries, it will also be  important to assess whether claims in one jurisdiction will be subject to limitation by reason of the establishment of a limitation fund in another. In this regard, it is important to note that not all countries are signatories
to a Limitation Convention. For example, China has not ratified any Limitation Convention (although it incorporates some similar wording to
the 1976 Convention into domestic law), so where a party is facing claims
in China and England, establishing a limitation fund in China will not suffice to limit liability in respect of proceedings brought in England[4].

Slot charterers

At any one time, container ships normally carry containers for a number
of liner operators. It is common industry practice for liner operators to have joint service agreements in place, whereby the different operators agree to swap charter space on each other’s ships. Slot charterers may therefore also face substantial cargo claims in the event of a casualty. 

The position under English law is now clear that charterers and also slot charterers are entitled to: (i) limit liability by constituting a limitation fund themselves or (ii) rely on the protection afforded by the limitation fund constituted by the owner even where the slot charterers have no direct contractual relationship with the owner[5]. However, NVOCCs and freight forwarders are not afforded the same protection and may only rely on package limitation.

Package limitation

A carrier may limit liability for loss or damage to the cargo under the
package limitation regime of the Hague Rules, the Hague-Visby Rules or the Hamburg Rules. 

For example, Article IV, Rule 5 of the Hague-Visby Rules states:

‘(a)… neither the carrier nor the ship shall in any event be or become liable
for any loss or damage to or in connection with the goods in an amount exceeding 666.67 [SDR] (special drawing right)[6] per package or unit or 2 [SDR] per kilogramme of gross weight of the goods lost or damaged, whichever is the higher…
(c) Where a container, pallet or similar article of transport is used to
consolidate goods, the number of packages or units enumerated in the bill of lading as packed in such article of transport shall be deemed the number of packages or units for the purpose of this paragraph as far as these packages or units are concerned. Except as aforesaid such article of transport shall be
considered the package or unit.’ 

When calculating the package limitation for containerised cargo, the description and weight of the cargo as described on the bill of lading must be taken into account. Under English Law, a container will not be considered to be the relevant ‘package or unit’. It is sufficient for the cargo to be accurately stated in the bill of lading and there is no additional requirement for the physical items of cargo to be described ‘as packed’[7].

In practice, the package limitation regime usually only assists a carrier
for reasonably high value cargoes. Also, local laws and practice in the
jurisdiction where cargo interests commence proceedings will often dictate whether a carrier can use the package limitation regime to limit liability.

Summary

Limitation of liability is an important and often complex aspect of a container ship casualty. Parties affected by such incidents will need to carefully consider their potential exposure at an early stage and take into account the different limitation regimes and jurisdictions when assessing whether to constitute a limitation fund. Package limitation will potentially be available to a carrier regardless of whether the tonnage limitation regime is called upon, but whether a carrier can limit liability will depend on the value, weight and particulars of the cargo as described in the bill of lading.

 

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1]  Claims for loss of life or personal injury are subject to a separate fund.
2]  International Convention relating to the Limitation of the Liability of Owners of Sea-Going Ships 1957 (Brussels Convention); Convention on Limitation of Liability for Maritime Claims, 1976 (LLMC Convention); 1996 Protocol to the LLMC Convention; and 2012 Amended 1996 Protocol to the LLMC.
3]  The US incorporates a different limitation regime based on the vessel’s value.
4]  Article 11 of the LLMC Convention 1976 refers to the constitution of a fund in a State Party. Thus a country which has not ratified the convention is not considered to be a State Party where a fund can be established.
5]  Metvale Ltd v Monsanto International Sarl and others (“MSC Napoli”) [2008] EWHC 3002
6]  1 SDR = U$1.38 as of May 2019. SDR currency valuations can be obtained on https://www.imf.org/external/np/fin/data/rms_five.aspx
7]  Kyokuyo Co Ltd v. A.P. Møller-Maersk A/S (Maersk Tangier) [2018] EWCA Civ 778