Wednesday, March 2, 2022

Limitation of liability and the recent fires aboard car carrier/ro-ro vessels ?


When I originally started writing this post on the admiralty and maritime law principal of Limitation of Liability, I had recently talked to a friend about Hurricane Sally and the eight-month Pensacola Bay Bridge closure. The Court handing the complaint for exoneration and limitation of liability had recently issued its ruling in that case and the factual background and legal analysis is fascinating.

Hurricane Sally struck the Pensacola Bay area on September 16, 2020. During the storm, 27 barges owned by Skanska broke loose causing damage to the Pensacola Bay Bridge and other properties around Pensacola Bay. The Pensacola Bay Bridge was closed for 8 months, so one can imagine the damage caused by the loose barges was significant and the cost to repair likewise. Skanska did what most companies engaged in maritime activities would do in this situation and filed a complaint in admiralty under the Limitation of Vessel Owner’s Liability Act, 46 U.S.C. § 30501 et seq. (the “Limitation Act”) in the local United States District Court seeking exoneration from or limitation of liability. The United States District Court of the Northern District of Florida, Pensacola Division, issued its Order and Final Judgment in IN RE SKANSKA USA CIVIL SOUTHEAST INC. AND SKANSKA USA, INC., AS OWNERS OF THE BARGE KS 5531 PRAYING FOR EXONERATION FROM OR LIMITATION OF LIABILITY Case No.: 3:20cv5980/LAC/HTC at the end of December 2021. Senior US District Judge Lacey A. Collier wrote a 40-page opinion which provides a detailed summary of the facts of the case and his legal analysis as to why Skanska was not entitled to exoneration or limitation under the “Limitation Act.” It is well worth the read.

But as I was about to publish this post, news broke that the Felicity Ace sunk to the bottom of the Atlantic. It seemed like a week ago, I was reading in the news that the fire aboard the vessel was out and salvors were towing the vessel to safety. A number of blog posts were commenting on salvage costs upwards of $150 million, and the possibility of another major general average case in just under a year.  The Ever Green grounding was March of 2021. So, my draft post drifted off course a little bit. And after some edits, back and forth as to what my post should focus on, I decided to drop anchor before I ran completely aground.   

Limitation of Liability is a historical legal principle developed by the European maritime powers of the time to protect shipowners from catastrophic liabilities in the case of maritime disasters. The medieval sea codes suggested the shipowner and voyage sponsor would not be held liable beyond the value of the vessel. The principle developed before corporations became a common method to limit shareholder liability or indemnity insurance became widely available. The principle was also a way to encourage investment and participation in the inherently dangerous nature of maritime ventures. Despite the long historical significance of this legal principle, it was not a feature of English admiralty law until about 1734. Despite numerous early English merchants and settlors, who had become accustomed to this rule of law during the settlement of North America, Maine and Massachusetts were the two states to adopt the principal into their respective state laws. The US Congress first enacted the Limitation of Liability Act in 1851 formally adopting this historical legal principle into federal law. Congress’s goal was to provide US documented ships with the same competitive edge as foreign counterparts, whose owners could limit their liability.

The Act is now codified under 46 U.S.C. § 30501 et seq. and formally known as the Limitation of Vessel Owner’s Liability Act. It applies to most vessels, including canal boats, barges, and lighters, operating on navigable bodies of water, including lakes and rivers. It applies to both commercial vessels and pleasure craft. The owner who may limit liability is usually the person with legal title to the vessel. The term owner could be a demise or bareboat charterer but is not a time or voyage charterer. Further, the term owner does not include the employer of the ship's crew or management company operating the vessel.

While protection and indemnity (P&I) insurer’s are not statutorily entitled to invoke limitation of liability, they may receive an indirect benefit from a successful limitation action. This is because most P&I policy terms provide that the insurer will only indemnify the insured up to the insured’s legal liability.

The Limitation Act does exactly what the title says. It limits a vessel owner’s liability for personal injuries, death, embezzlement, loss, or destruction of any property, goods, or merchandise shipped on board the vessel to the value of the vessel at the conclusion of the voyage and the pending freight (I.e. the total earning of the vessel for the voyage), as long as the loss occurred without the owner’s privity or knowledge of the negligent acts or unseaworthiness that caused the casualty. Whether the owner lacked privity or knowledge is on the owner to prove. Privity or knowledge will exist where the owner has actual knowledge or had notice and could have obtained the knowledge by reasonable inquiry or inspection.  The fact of privity or knowledge is often heavily fact dependent, and establishing privity or knowledge is often a legal strategy to overcome a limitation claim.

The value of the vessel at the conclusion of the voyage and the total earning of the vessel for the voyage is called the initial limitation fund. In the case of a marine casualty of a “seagoing vessel” that involves personal injuries or death, and the initial limitation fund is inadequate to cover the personal injury and death damages, the vessel owner must also establish a supplemental fund of up to $420 per gross ton of the vessel to cover the personal injury and death damages. Certain types of vessels are not subject to the supplemental fund requirement. These vessels are statutorily defined and include pleasure yachts, tugs, towboats, towing vessels, tank vessels, fishing vessels, fish tender vessels, canal boats, scows, car floats, barges, lighters, or nondescript vessels.

In the case of fire damage, vessel owners are entitled to even greater protection. The owner of the vessel is also not liable for loss or damage caused by fire unless the fire resulted from the actions or negligence of the owner. It is usually the cargo interest’s burden to prove the fire was caused by the design or neglect of the vessel owner. Proofing that negligence on the part of the master, crew, or independent contractors was the cause of the fire is insufficient. To overcome the fire damage protection, the cargo interest must show the vessel owner was negligent, such as in the hiring incompetent individuals in performance of their duties. And maybe, in the not implementing fire safety measures it was actually aware needed to be in place.

The Act also limits the potential liability for small items such as precious metals, gold or silver, precious stones, jewelry, trinkets, watches, clocks, coins, bills, securities, printings, engravings, pictures, stamps, maps, papers, silks, furs, lace, and other item of high value and small size to the value entered by the shipper on the bill of lading.  

The timing of the filing of a complaint for limitation is important. A vessel owner has six months from receipt of written notice of a claim exceeding the vessel’s value to file its complaint for exoneration or limitation. The written notice of claim triggering the six-month period, does not necessarily have to be in an amount in excess of the vessel’s value, if the owner knows or should know that the claim could potentially exceed the value of the vessel.  Likewise, if the owner knows or should know that the value of multiple potential claims will exceed the value of the vessel, the six-month period to file the complaint may be triggered by receipt of the first claim.

While I was originally planning to provide a summary of Judge Collier’s decision, my mind started racing when I read that the vessel Felicity Ace sunk yesterday morning. This car carrier was reportedly carrying thousands of brand-new Volkswagen, Porsche, Bentley, and Lamborghini vehicles. This marine casualty began on February 16th, when the vessel caught fire en route from Germany to Rhode Island. The last I checked the cause of the fire is unknown, but it is believed firefighting operations were complicated by the number of electric cars onboard which also caught fire. Thankfully, the entire crew was rescued. But if you have bought a car recently, you will know that some new car models are hard to find and car prices on all models are at all-time highs. Based on some news reports, the loss of the vehicles alone is $300 million plus, with at least one news outlet putting the number higher than $400 million. The Felicity Ace was not cheap either.

Under the Limitation Act the vessel is, in my opinion, now worth nothing sitting on the bottom of the sea. I am not sure what the total earnings of the vessel for this voyage was either. With the cause of the fire unknown, and unlikely to be determined unless one of the salvors or crewmembers determined the cause before sinking, under US law the owner will most likely be exonerated.

 Even if the vessel owner is not exonerated, a limitation fund under US law could be a pittance compared to the potential total amount of the claims of the shippers.  The total amount of the claims may be impacted by the applicability of the whether the carrier’s bill of lading adequately adopted Carriage of Goods by Sea Act (COGSA)’s $500 per package limitation, and whether the shipper had a fair opportunity to opt for a higher liability by paying a corresponding greater charge.

So, who is going to pay for all this? The simple answer is that most likely there is some sort of commercial insurance in place that will cover some of the financial losses. It is common for shippers to carry their own cargo insurance to cover lost or damaged cargo during transport.  But with the number of car carrier/ro-ro vessels involved in major marine fire casualties in recent years, (Grande America, MV Golden Ray, MV Hoegh Xiamen, Felicity Ace), is there a basis to reevaluate the apparent legal presumption the owner will be entitled to exoneration in fire damages cases?



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