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ACI’s 6th Annual Forum onAdmiralty & Maritime Claims and Litigation

Limitation of Liability and

SalvageFrank J. Gonynor

Senior Claims Adviser

Gard (North America) Inc.

January 30-31, 2017

Tweeting about this conference?

Peter G. Pamel

Partner

Borden Ladner Gervais

LLP

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You Have to

Know Your

Limitations!*

*In the words of the great legal expert and philosopher, ‘Dirty’ Harry Callahan:

https://www.youtube.com/watch?v=_VrFV5r8cs0

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Old, but still alive and kickin’

The Limitation of Liability Act of 1851 – 46 U.S.C. sec. 30505

• Court sums it up in In Re Bell, 2014 AMC 254 (W.D.- WA 2014): “…that act, which is little-used today, has been described as "a relic of the clipper ship era in which it was launched," and “"an 'anachronism, a principle which should be relegated to the era of wooden hulls'“

• Despite its old age, the Act is still the law of the land.

• Little about the Act has changed since its passage, either by judicial interpretation or legislative amendment.

Trivia: Enacted the same year ‘”Moby Dick” or The Whale’ by Herman Melville was published

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A Brief Review –The Limitation of Liability Act of 1851• Its original motive was to

make the U.S. merchant shipping fleet on a competitive legal par with British merchant shipping, spurred on by the new valuable shipping trade of the California Gold Rush. In other words, U.S. ‘better trade deals’ – some things never change:

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The basics of the Limitation Act

• Simply put, the Act limits the liability of a ship owner, without its privity or knowledge, for damages after a marine casualty, to the value of the vessel post casualty, plus any pending freight/contractual payments. Not included in the limitation fund are the proceeds from vessel insurance policies [Norwich Co. v. Wright, 80 U.S. (13 Wall) 104 (1871)].

• It applies to recreational vessels, too, down to the smallest jet-ski [Keys Jet Ski, Inc. v. Kays, 893 F.2d 1225 (11th Cir. 1990).

• In personal/death claims, a supplemental fund of $420 per g.r.t.-[46U.S.C.sec30506b]. Ex: ‘Costa Concordia’ – 114,137x$420=$47.93million, if regular Fund would be insufficient to pay losses in full.

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But there are limitations to the Limitation!

• The pathway to obtaining Limitation under the Act is narrow, and made even more arduous by court rulings on such cases.

• If the claimants establish that the owner was negligent, then the burden of proof rests on the ship owner to prove lack of privity or knowledge to the factual circumstances that led to the casualty – i.e. ‘ignorance of the facts is an excuse’ ?

• Ship owners cannot turn a blind eye to their ships – courts have held an affirmative duty to inquire and look after the safe operations of a ship, and to have policies to ensure compliance with safety standards,

• Modern communications and reporting requirements means shore side official personnel of a ship are made aware of details of everyday activities on a ship, and even more so of dire situations.

• At least there’s the ability to achieve concursus of all claimants – Rule F of the Supplemental Admiralty and Maritime Claims Rules –F.R.C.P.

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Limits to the Limitation (cont.)

• The concursus is not needed in cases where the aggregate value of all of the claims don’t exceed the value of the vessel and pending freight, and so claimants can pursue claims in state court. In Re Dammers, 836 F.2d 750 (2d Cir. 1988).

• Similarly, in a case where there is a single claimant, this sole litigant can pursue claim in state court, but only if that claimant concedes the federal court ultimately can determine the issues under the Act and may end up exonerating or limiting the liability of the ship owner. Dammers, ibid. The stipulation include atty fees/costs in the limit amount. See In re Complaint of Natures Way Marine, LLC, 2012 AMC 2867 (S.D. Ala. 2012).

• Additionally, in multiple claimant situations where claims exceed the limitation amount, parties may proceed if they sign stipulation that limitation amount is preserved and no competition on the fund. See In Re Ill. Marine Towing, Inc.498 F.3d 645, 651 (7th Cir. 2007), citing other cases.

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Viewpoint- Courts chafe at use of Limitation of Liability Act and try to avoid it: but is this always the outcome?

• In Re Seastreak LLC, case no. 2:13-00315, U.S.D.C. – N.J., in the aftermath of a ferryboat allision at Pier 11 NYC, there were claims of $75 million+. Attempted to limit to $7.6 million for value of the vessel. Claimants argue ‘flotilla rule’ applied, and thus fleet wide vessel collective value of about $32 million.

• Germain v. Ficarra (In re Germain), 824 F.3d 258 (2d Cir. 2016): recreational boat owner Limitation of Liabiltity Act action – swimmer backflips from boat into Lake Oneida – held admiralty tort jurisdiction.

• Am.River Transp. Co. V. U.S., 800 F.3d 328 (8th Cir. 2015), regarding damage to U.S. government locks and dams, etc., the Limitation of Liability Act prevails over the River and Harbors Act [citing language in Univ. of Tex., 557 F.2d 438 (5th Cir. 1977): Faced with "the unenviable task of deciding whether an impossibly obscure law (the [RHA]) prevails over a hopelessly anachronistic one (the Limitation Act)," we are—as the Fifth Circuit once described it—"adrift on muddied waters that lie at the convergence of two desultory streams of nineteenth century thought." ] and so the federal government as claimant needs to maintain a Limitation of Liability Action claim (this decision was the end product of an originally opposite holding, later reversed and remanded); 5th

Circuit feels differently : In Re Southern Scrap, 541 F.3d 584 (5th Cir. 2008).

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Court cases (cont.)

• There is a split in circuits on this issue, with the Fifth Circuit maintaining that no in personam action is available to the federal government for damage to government owned locks/structures and thus only an in rem action subject to the Limitation of Liability Act - In re Barnacle Marine Mgmt. Inc., 233 F.3d 865, 870 (5th Cir. 2000), in contrast to the 6th Circuit, which permits such actions and thus an unlimited liability - Hines, Inc. v. United States, 551 F.2d 717, 727 (6th Cir. 1977). Subsequent district court cases have been thus disparate in their outcomes.

• In Re Aramark Sports, no. 14-4118, U.S. 10th Cir., decided 1 Aug 16, arising out of recreational boating accident on Lake Powell, court affirmed interlocutory right of appeal of determination of exoneration/limitation under the Act.

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Significant areas of maritime liability is not subject at all to the Limitation of Liability Act, namely claims under the Oil Pollution Act of 1990; wreck removal when non-compliance with the Wreck Act.

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Lack of Privity or Knowledge

• Actual knowledge.

• Constructive knowledge – could have know by reasonable inspection or inquiry, even beyond a specific legal requirement.

• Assure that the ship was seaworthy before the start of the fateful voyage.

• Corporate ‘management’ – how low does this go in today’s style of vessel operations/management?

• Negligent entrustment/bad crew.

• Inadequate maintenance/charts/navigational equipment.

• Inadequate training

The crux of it – sudden navigational or operational negligence on the ship is OK to limit, but is there knowledge of the shipowner of the underlying facts that created that condition? Is there a failure by the shipowner of looking into the areas of vessel safety or avoiding dealing with ship problems?

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Has current technology put a practical end to the ‘privity and knowledge’ defense?

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Privity and Knowledge (cont.)

• Lloyd’s Open Form - a contract on the rocks?

• 15 December 2016

• Sam Kendall-Marsden, Head of Division, UK & Americas, during a panel discussion on the Lloyd’s Open Form salvage contract (LOF) at the 19th Annual Salvage & Wreck Conference in London on 7 December 2016:

It could be argued the speed of modern communications undermines the need for an emergency-type contract. A master is not always required to make a unilateral decision in the heat of the moment as he once was. Now, he can obtain advice from shore-based colleagues, which opens up the possibility of alternative forms of contract. Against this though, it may be argued only the master is in a position to appreciate all of the relevant circumstances he faces that will dictate the speed and nature of response required, and LOF may be the best contract for the situation.

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The ‘Kulluk’ incident –December, 2012 – loss off tow and grounding - Alaska

• No limitation was filed, and the vessel was successfully refloated.

• But provides example of type of e-mail messages that might have proved to be critical in a judicial inquiry as to privity and knowledge of the shoresidemanagers involved in the towing operation.

• After a prior voyage, the Aiviq’s captain sent an email to Chouest headquarters titled “Storm Damage Lessons Learned” and recommended that they raise the height of its fuel vents to avoid future submersion during the next big tow through heavy Alaskan seas, but this was never done.

• Misidentified tow shackle capacity-failed.

• Crew members ignored alarms and some, including the captain, may have committed negligence, the USCG report said.

• According to the Coast Guard report, the Aiviqtow master sent an email to the Kulluk tow master before the journey: "To be blunt I believe that this length of tow, at this time of year, in this location, with our current routing guarantees an ass kicking.“

• USCG conclusion: Shell's drilling rig, Kulluk, ran aground off the coast of Alaska in late 2012 due to the company's "inadequate assessment and management of risks" , including the route chosen, the towing plan, the prior mechanical issues on prior voyages, and timing of voyage, in part to avoid Alaska property tax.

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The ‘El Faro’ tragedy: how will the Limitation of Liability petition fare?

• Decisions made on weather info – was it adequate? Was a course change imperative? Was there negligence?

• NTSB and Coast Guard have said, “The weather data supplied by the National Hurricane Weather Center was, however, incorrect.”

• Was the vessel seaworthy when it departed?

• Was contact with the shoreside office enough to create privity of negligence?

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Future Technology - Autonomous Vessels – End of the Lack of Privity, or is it a Revival of Privity?

• Bjørn Kjærand Haugland, EVP & Chief Sustainability Officer DNV GL:

• Increased safety

• Reduced operational cost

• Reduced construction costs

• Increased environmental sustainability

• Increased social sustainability

• Stronger competence

• Increased competitiveness

• Reduced risk of piracy

• Opening of new opportunities and solutions

• New Business models

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Future Technology - Autonomous Vessels (cont.)

• Is there a difference between a truly autonomous ship and a ‘drone’ vessel, controlled from shore?

• Technological advances can reduce accidents, but history shows they are never eliminated, and in fact, new types of causes of accidents occur – e.g. overreliance, overconfidence.

• If a well respected tech company installs hardware/software, hired by the ship owner, and there is a latent ‘glitch’ that causes an accident – would this allow the assertion by the owner/operator of lack of privity?

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Remember George Jetson!

https://www.youtube.com/watch?v=IxcsWmoxlb0

https://www.youtube.com/watch?v=IxcsWmoxlb0

https://www.youtube.com/watch?v=IAZiJWx5LYU

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Canadian perspective

Legislation

• 1976 Limitation Convention

• The Athens Convention

• The Hague Visby Rules

• 1992 CLC Convention and Fund Convention

• The Bunker Convention

To what does it apply

Any vessel or craft designed or capable of being used solely or partly for navigation (whether seagoing or not) without regard to method or lack of propulsion, but does not included an air cushion vehicle or floating off shore, oil and gas platform.

Same definition as 76 Limitation Convention except it does not apply to a vessel propelled manually by paddles or oars.

Any vessel used for the carriage of goods by water.

Any seagoing vessel or seaborne craft of any type whatsoever constructed or adapted for the carriage of oil in bulk.

Any seagoing vessel and seaborne craft of any type whatsoever.

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Limitation of Liability

Right to limit

• General Limits

• Salvor not operating from a ship

• Owners of Docks Canals and Ports

• Loss of Right to Limit

Statutory limits

• less than 300 gross tons – the Marine Liability Act (MLA)

• more than 300 gross tons - the Limitation Convention.

• Passengers - Article 7 of the Limitation Convention and section 28 of the MLA.

• It should be noted that pursuant to Article 6(2) where the limitation amount applicable to a personal injury claim is insufficient to satisfy all such claims the amount applicable to property damage claims shall be made available to satisfy the personal injury claims. (This does not apply to vessels under 300 tons which are governed by s. 29 of the MLA, not the Limitation Convention.)

• the limits of liability applicable according to a tonnage of 1,500 tons.

• section 30 of the MLA includes special limitation provisions applicable to owners of a dock, canal or port including any person having the control or management of the dock, canal or port and any ship repairer using the dock, canal or port.

• The right to limit liability is lost if it is proved that the loss resulted from the personal act or omission of the person seeking to limit and “committed with intent to cause the loss or recklessly and with knowledge that the loss would probably result”. - CAPE APRICOT 2014 FCA 231

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Who can limit

Convention

• 1976 Limitation Convention

• The Athens Convention

• The Hague Visby Rules

• 1992 CLC Convention and Fund Convention

• The Bunker Convention

Beneficiary

Shipowner (defined as owner, charterer, manager, operator), salvor and all persons for whose acts the shipowner or salvor is responsible, and their underwriters, whether actions in personamand in rem. MLA extends right to limitation of liability to owner of docks, canals and ports at Section 30 MLA.

“Carrier” being any person by or on behalf of whom a contract of carriage has been concluded, and by the “performing carrier”, being the owners, charterer or operator of a ship who is not the carrier.

Owner or charterer who enters into a bill of lading contract

Owner – defined to mean the registered owner of the vessel, or the actual owner where no such registration exists.

The servants or agents of owner, members of crew, pilots, charterers, managers, operators, salvors or persons taking preventive measures are exempt from liability unless damage resulted from their personal act or omission with the intent to cause damage, or recklessly and with knowledge that such damage would probably result.

Shipowner defined as registered owner, bareboat charterer, manager and operator of vessel.

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Conduct Barring Limitation

Statute or Convention

• 1976 Limitation Convention

• Marine Insurance Act, 1993, c.22

Wording

Article 4 - 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

Section 53 (2) - Without limiting the generality of subsection (1), an insurer is not liable for any loss attributable to the wilful misconduct of the insured …

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Peracomo Inc. v. Telus Communications[2014] 2 Lloyd’s Rep 315 (S.C.C.)

• Degree of fault in both the Limitation Convention and the Marine Insurance Act are different.

• The Limitation Convention imposes a higher degree of fault.

• It was not enough, in order to lose the right to limit liability, that the owner intended to cause damage. It was necessary that he intended to cause “this” degree of damage.

• The right to limit under the Limitation Convention is meant to be unbreakable.

• Under the Marine Insurance Act, willful misconduct is doing something wrong, knowing it to be wrong or with reckless indifference. There is no element of intent to cause loss, or even intent to cause “this” loss.

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Salvage

• How old is it - dates back to ancient times and referred to in the The Lex Rhodia circa 800 BC, thereafter in the Rules of Oleron, circa 12th century AD.

• What is it - …”the clearest general right that they who have saved lives and property at sea should be rewarded for such salutory exertions” – Lord Stowell in The Waterloo (1820) 2 Dods.

• Where does it come from - It does not emanate from contract, but from equity. However a contract may set the rules upon which awards are determined.

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Salvage

• “The jurisdiction which the Court exercises in savage cases is of a peculiarly equitable character. The right to salvage may arise out of an actual contract; but it does not necessarily do so. It is a legal liability arising out of the fact that property has been salved, that the owner of the property has had the benefit of it shall make remuneration to those who have conferred the benefit upon him, notwithstanding that he has not entered into any contract on the subject.”

Sir James Hannen P. , The Five Steel Barges (1890) 15 P.D. 142.

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Elements of Salvage

• Danger - real and apparent (reasonable apprehension) danger to maritime property from which such property must be extricated on pain of being lost.

• Service – there must be a positive service which has assisted in the extrication of the marine property from danger. –includes standing-by

• Voluntariness of the salvors –the subsequent execution of a contract does not detract from the voluntary element of the services.

• Success – no cure – no pay.

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Codification of the principles of salvage

The Assistance and Salvage Convention, 1910

• Concerns solely the saving of life and property at sea.

• Remuneration should be fixed by a court or arbitrator.

• Sets out criteria to be evaluated in fixing awards of salvors.

• Any salvage agreement may be annulled by the Court if inequitable.

• Codified a master`s obligation to render assistance to any person in danger at sea.

The Salvage Convention, 1989

• Expanded the application of salvage to take into consideration the growing concern over environmental damage.

• Set rules for the increasing exposure to liability of salvors.

• Codified some of the already existing protections in LOF agreements.

• Expanded the criteria for evaluation of awards, including special compensation for efforts in minimizing or avoiding environmental damage.

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Lloyd`s Standard Form of Salvage Agreement –No Cure – No Pay (Lloyd`s Open Form).

• First standardized in the late 19th century.

• Subsequent versions incorporated the principles of the Assistance and Salvage Convention, 1910.

• LOF 80 allowed for the increase in Special Compensation in the event environmental damage is avoided or minimized – later reflected in The Salvage Convention, 1989 .

• Modifies the no cure – no pay rule. Special Compensation P&I Club Clause (SCOPIC) –meant to add certainty in the awarding of special compensation.

• Incorporates dispute resolution provisions

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Insurance Issues in Salvage

• Hull and Machinery• Salvage awards are covered

• Up to limits of cover

• Can declare a CTL

• P & I Clubs• liabilities under the “safety net” provisions of LOF 80 or

LOF 90, or SCOPIC provisions of LOF 2011

• Wreck removal orders

• Pollution damage, or expenses in avoiding damage to the environment

• Life salvage

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Bibliography

• ‘The Limitation of Liability Act: Arcane But Ours’, Marissa Marriott Henderson, 14 Benedict’s Maritime Bulletin, Second Quarter 2016, pp. 77-80.

• SAFETY4SEA Noon Report, 28 December 2016, SQE Marine

• European Maritime Safety Agency 2016 Annual Overview of Marine Casualties and Incidents, found at: http://www.emsa.europa.eu/emsa-documents/latest/item/2903-annual-overview-of-marine-casualties-and-incidents-2016.html

• ABA Admiralty and Maritime Law Committee Newsletter, Summer 2016, The Barnacle Controversy: A Marine Insurance Dilemma and Not the Title of a Spongebob Squarepants Episode, James L. Johnsen pp. 9, 17-22.

• Brice on Maritime Salvage, 5th ed., Sweet & Maxwell, 2011.

• Kennedy`s Law of Salvage, 5th, ed., Stevens & Sons, 1985